PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
CALDERWOOD & HARKNESS LLP Attorneys at Law
1000 Louisiana Street, Suite 5500 Houston, Texas 77002 Telephone: (713) 555-4200 Facsimile: (713) 555-4201 www.calderwoodharkness.com
MEMORANDUM
TO: Raymond T. Calloway, Chairman & CEO, and Sandra M. Briggs, President & COO Calloway-Briggs Renewables Inc. 2200 West Commerce Street, Suite 1400 Houston, Texas 77002
FROM: George Trujillo, Partner, and David Stanton, Associate Calderwood & Harkness LLP
DATE: November 2022
RE: Summary and Analysis of Key Terms — $26,000,000 Construction-to-Term Loan Facility, Brazos River National Bank, N.A. — Lone Star Battery Storage Project
Matter No.: 1015-00003
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I. Executive Summary
The purpose of this memorandum is to summarize and analyze the principal terms of the proposed $26,000,000 construction-to-term loan facility (the "Credit Facility" or the "Loan") between Lone Star Storage I, LLC (the "Borrower"), a wholly owned Texas limited liability company subsidiary of Calloway-Briggs Renewables Inc. ("CBR" or the "Guarantor"), and Brazos River National Bank, N.A. ("BRNB" or the "Lender"), acting as both Administrative Agent and sole lender under the Credit Agreement. This memorandum has been prepared at your request for internal review and discussion purposes and is subject to attorney-client privilege.
The Credit Facility is intended to provide construction and permanent financing for the Lone Star Battery Storage Project (the "Project"), a 50 MW / 200 MWh lithium iron phosphate (LFP) battery energy storage system (BESS) to be located on a 15-acre parcel in Ector County, Texas (nearest postal address: 4800 West University Boulevard, Odessa, TX 79764). The Project, upon completion and energization, will participate in the Electric Reliability Council of Texas (ERCOT) wholesale electricity market, providing ancillary services, energy arbitrage, and capacity to the ERCOT grid.
The total project development value is estimated at $40,000,000. The Credit Facility represents 65% of total project value ($40,000,000 × 65% = $26,000,000), with the remaining 35% ($14,000,000) to be funded by equity contributions from CBR ($9,100,000, representing 65% of total equity) and Ridgepoint Capital Partners, LP ($4,900,000, representing 35% of total equity). This capital structure reflects a leverage ratio that is generally consistent with market standards for single-asset BESS project finance transactions in ERCOT.
Lender's counsel in the transaction is Archibald, Fenn & Shaw LLP (Robert C. Fenn, Partner), located at 1700 Pacific Avenue, Suite 4000, Dallas, Texas 75201. Borrower's counsel is Calderwood & Harkness LLP. The Lender relationship manager for this transaction is Angela P. Montrose, Senior Vice President, Energy Finance, BRNB, located at 600 Main Street, Fort Worth, Texas 76102. Ms. Montrose has served as the primary point of contact for credit approval and documentation negotiations throughout the term sheet and credit agreement process.
Please note that Calderwood & Harkness LLP will deliver a borrower's counsel legal opinion at financial close, the scope and substance of which are discussed further in Section V below. All principal agreements — including the Credit Agreement, the Guaranty, the Deed of Trust, the Security Agreement, the Pledge Agreement, and the various collateral assignment agreements — are anticipated to be signed on December 1, 2022, with financial close (and the initial advance under the Credit Facility) targeted for early 2023, currently expected to occur on or about February 10, 2023, subject to satisfaction of all conditions precedent.
This memorandum is organized as follows: Section II identifies the parties to the Credit Agreement and provides relevant background information. Section III sets forth the principal commercial terms of the Credit Facility. Section IV summarizes the capital structure. Section V describes the conditions precedent to the initial advance. Section VI details the security package. Sections VII through IX summarize the key representations, covenants, and events of default. Sections X and XI address governing law, dispute resolution, and the anticipated transaction timeline. Section XII presents our analysis and key observations regarding certain structural and risk considerations. Section XIII identifies outstanding items and recommended next steps. Appendices A and B provide a defined terms glossary and a summary term sheet in tabular format, respectively.
II. Parties to the Credit Agreement
A. Borrower. The Borrower under the Credit Agreement is Lone Star Storage I, LLC, a Texas limited liability company (EIN: 88-1623504). Lone Star Storage I, LLC was formed as a single-purpose project company for the express purpose of holding all Project assets, contracts, permits, and related rights. Its formation as an SPE is consistent with standard project finance structuring requirements and is reflected in certain negative covenants within the Credit Agreement, as described in Section VIII below.
The registered agent for Lone Star Storage I, LLC is CT Agents of Texas, LLC, located at 1999 Bryan Street, Suite 900, Dallas, Texas 75201. The sole manager of the Borrower is Calloway-Briggs Renewables Inc. Lone Star Storage I, LLC is a wholly owned subsidiary of CBR, with CBR holding 100% of the membership interests in the Borrower. These membership interests are pledged to the Lender as part of the security package described in Section VI.
B. Guarantor. The Guarantor under the Credit Agreement is Calloway-Briggs Renewables Inc., a Texas corporation (EIN: 82-3047591), with its principal offices located at 2200 West Commerce Street, Suite 1400, Houston, Texas 77002. The principals of CBR are Raymond T. Calloway, who serves as Chairman and Chief Executive Officer, and Sandra M. Briggs, who serves as President and Chief Operating Officer.
CBR was founded in 2014 and is engaged in the development, ownership, and operation of utility-scale renewable energy and energy storage assets across the ERCOT market. As of the date of this memorandum, CBR has approximately 1.2 GW of solar generation capacity and 400 MW of battery energy storage capacity in various stages of development, construction, and operation. CBR reported annual revenues of approximately $185 million for fiscal year 2021, based on its most recently available audited financial statements.
CBR is majority-owned by its founders, Mr. Calloway and Ms. Briggs. A 35% minority equity stake in CBR is held by Ridgepoint Capital Partners, LP (Lawrence K. Denham, Managing Partner), a Dallas-based infrastructure investment fund with approximately $2.8 billion in assets under management. The Ridgepoint investment provides CBR with additional financial capacity and institutional sponsorship, both of which are relevant to the Lender's credit assessment.
In connection with the Credit Facility, CBR is providing a limited recourse completion guarantee in favor of BRNB, the terms and analysis of which are discussed in detail in Section VI.D below.
C. Lender / Administrative Agent
The Lender under the Credit Agreement is Brazos River National Bank, N.A., a national banking association chartered by the Office of the Comptroller of the Currency (OCC). BRNB's principal office is located at 600 Main Street, Fort Worth, Texas 76102. BRNB is a regional banking institution with approximately $18 billion in total assets and an active lending presence in the Texas energy and infrastructure sectors. BRNB has an established track record of providing construction and term financing for renewable energy and energy storage projects in the ERCOT market.
In this transaction, BRNB serves in a dual capacity as both the sole lender and the Administrative Agent under the Credit Agreement. Because the Credit Facility is a single-lender facility (i.e., there are no syndicate participants), the Administrative Agent role is streamlined relative to a multi-lender syndicated facility. Nevertheless, the Credit Agreement includes standard Administrative Agent provisions, which would facilitate future syndication or loan participation if BRNB elects to sell down a portion of its commitment at a later date.
The relationship manager for the Credit Facility is Angela P. Montrose, Senior Vice President, Energy Finance, at BRNB. Ms. Montrose has been the primary commercial contact throughout the credit origination process and has been instrumental in structuring the facility terms.
D. Independent Engineer (Retained by Lender)
BRNB has retained Norgate Technical Advisors, Inc. as the independent engineer for the Project. Norgate's offices are located at 700 Louisiana Street, Suite 2100, Houston, Texas 77002. The lead engineer for this engagement is Dr. Phillip S. Reardon, P.E.
Norgate has been retained by BRNB to review and certify the technical aspects of the Project for purposes of lender due diligence. Norgate's scope of work includes, among other things, review of the EPC Agreement, the Equipment Supply Agreement, the Project's technical design and engineering specifications, the construction schedule and budget, the contractor's qualifications, and the projected performance characteristics of the BESS. Norgate's independent engineer report is a condition precedent to the initial advance under the Credit Facility and will also play a continuing role during the construction period, as each draw request under the Credit Agreement requires Independent Engineer certification.
III. Credit Facility — Principal Terms
A. Type and Amount
The Credit Facility is structured as a construction-to-term loan facility, which means that upon satisfaction of specified conversion conditions (including achievement of Commercial Operation Date), the construction loan will automatically convert to a term loan without the need for a separate refinancing or a new credit agreement. This structure provides the Borrower with financing certainty through both the construction and operating phases of the Project.
The aggregate commitment under the Credit Facility is $26,000,000, representing 65% of the total project development value of $40,000,000. This is a single-lender facility, with BRNB providing the entirety of the $26,000,000 commitment. There is no syndication or participation arrangement contemplated at this time, although the Credit Agreement does not prohibit BRNB from assigning or selling participations in the future, subject to customary notice and consent provisions.
B. Purpose. The proceeds of the Credit Facility are to be used exclusively to finance the engineering, procurement, construction, testing, and commissioning of the 50 MW / 200 MWh LFP battery energy storage system in Ector County, Texas. Specifically, loan proceeds will be applied toward the following categories of expenditures:
(a) Payments due under the EPC Agreement with Meridian Power Construction, Inc. (the "EPC Contractor"), pursuant to which the EPC Contractor has agreed to design, engineer, procure, construct, test, and commission the BESS on a fixed lump-sum, date-certain basis at a Contract Price of $31,200,000;
(b) Network upgrade costs in the amount of $2,800,000, as determined by the ERCOT Full Interconnection Study completed in August 2022, payable by the Borrower in connection with interconnection at the Western Permian 138 kV Substation in Ector County, Texas;
(c) Other development costs, including but not limited to soft costs, development fees, interest during construction, financing costs, legal and advisory fees, insurance premiums, and the funding of required reserve accounts; and
(d) Such other costs and expenses as are set forth in the approved construction budget.
All draws under the Credit Facility are subject to the satisfaction of conditions precedent as described in Section V below and to the draw request procedures specified in the Credit Agreement, including certification by the Independent Engineer that the work for which payment is requested has been satisfactorily completed in accordance with the EPC Agreement and the approved construction budget and schedule.
C. Interest Rate
The Credit Facility bears interest at a floating rate equal to the Secured Overnight Financing Rate (SOFR) plus a margin of 275 basis points (2.75%) per annum. The Credit Agreement includes a SOFR floor of 0.50% per annum, such that if the prevailing SOFR rate falls below 0.50%, the floor rate of 0.50% will apply. Accordingly, the effective minimum all-in interest rate under the Credit Facility is 3.25% (0.50% floor + 2.75% margin).
Interest is calculated on an actual/360-day basis, which is standard for commercial lending transactions and results in a slightly higher effective yield to the Lender than a 365-day basis. During the construction period, interest payments are due and payable on a monthly basis. Following conversion to the term loan upon achievement of COD, interest payments shift to a quarterly payment schedule, consistent with the anticipated quarterly revenue cycle of the Project.
Analysis: The SOFR + 275 bps interest rate is within the prevailing market range for construction loans in the renewable energy and energy storage sector for borrowers with the credit profile of Lone Star Storage I, LLC, a single-purpose project company backed by a completion guarantee from a sponsor of CBR's financial capacity. The 0.50% SOFR floor provides BRNB with downside rate protection in the event of a sustained low-interest-rate environment. Given current SOFR levels (which, as of the date of this memorandum, are well above the 0.50% floor), the floor is not expected to be operative in the near term; however, it provides embedded optionality for the Lender over the seven-year life of the facility. Borrower should consider whether an interest rate hedge (e.g., an interest rate swap or cap) is advisable to mitigate floating-rate risk during the term period; the Credit Agreement permits (but does not require) hedging arrangements with BRNB as counterparty.
D. Unused Commitment Fee
The Credit Agreement provides for an unused commitment fee of 0.50% per annum on the daily average undrawn portion of the $26,000,000 commitment. This fee is payable quarterly in arrears and accrues from the effective date of the Credit Agreement until the earlier of (i) full disbursement of the $26,000,000 commitment, or (ii) termination of the Lender's commitment.
Analysis: The 0.50% unused commitment fee is a standard market fee for construction facilities of this type. The fee is intended to compensate the Lender for maintaining the availability of the undrawn commitment and serves as an economic incentive for the Borrower to draw down the facility in a timely manner consistent with the approved project construction schedule. Given the anticipated nine-month construction period (February 2023 through August/September 2023), the total unused commitment fee exposure is manageable, but Borrower should ensure that the draw schedule under the EPC Agreement is coordinated with the loan draw schedule to minimize the period during which significant undrawn balances remain outstanding.
E. Maturity. The Credit Facility has a stated maturity of seven (7) years from the date of Financial Close. Based on the anticipated Financial Close date of February 10, 2023, the expected maturity date of the Credit Facility is February 10, 2030.
The current draft of the Credit Agreement does not include any extension options. Any extension of the maturity date would require the Lender's prior written consent and would necessitate a formal amendment to the Credit Agreement, likely accompanied by additional documentation, updated due diligence, and potentially revised commercial terms. We note that a seven-year maturity provides a reasonable operating period following the expected COD (August/September 2023) during which to amortize the outstanding principal balance of the Loan.
F. Amortization. Principal amortization under the Credit Facility is structured on a sculpted debt service basis, calibrated to the projected contracted cash flows of the Project. The sculpted amortization profile is designed to achieve and maintain a target Debt Service Coverage Ratio (DSCR) of 1.40x throughout the term period.
Amortization commences following achievement of the Commercial Operation Date (the "COD"). The expected COD is August 15, 2023. The Guaranteed COD under the EPC Agreement with Meridian Power Construction, Inc. is September 1, 2023 (with a 15-day cure period). During the construction period (from Financial Close through COD), the Borrower will make interest-only payments, with no principal amortization required.
Analysis: The sculpted amortization structure is a hallmark of project finance lending and provides significant flexibility by aligning principal repayment obligations with the Project's actual and projected revenue-generating capacity. Unlike a straight-line or mortgage-style amortization schedule, a sculpted profile adjusts quarterly principal payments based on the expected cash flow waterfall of the Project, ensuring that the DSCR target of 1.40x is maintained in each measurement period. The 1.40x DSCR target is consistent with lender expectations for single-asset BESS project finance transactions and provides a reasonable cushion above 1.00x breakeven. The DSCR cushion ensures that the Project's operating cash flows are sufficient to cover debt service obligations with a meaningful margin of safety, thereby reducing the risk of default attributable to cash flow variability. We note that the sculpted amortization schedule will be finalized based on the base-case financial model, which is currently being reviewed by the Independent Engineer.
G. Prepayment. Voluntary Prepayment. The Credit Agreement permits voluntary prepayment of the outstanding principal balance without penalty, provided that such prepayment occurs after the first anniversary of the conversion of the construction loan to the term loan. During the first year following conversion, voluntary prepayment is subject to a make-whole premium (the specific terms of which are set forth in Section 2.05(b) of the Credit Agreement and are not detailed in this summary). After the initial one-year period, voluntary prepayments may be made in whole or in part, on any scheduled payment date, upon not less than five (5) business days' prior written notice to the Lender.
Mandatory Prepayment. The Credit Agreement includes mandatory prepayment provisions triggered by the occurrence of certain specified events, including:
(a) Change of Control: Any change of control of the Borrower or, under certain circumstances, the Guarantor, triggers a mandatory prepayment obligation;
(b) Asset Dispositions: Net proceeds from any sale, transfer, or other disposition of material Project assets (subject to reinvestment rights and de minimis thresholds);
(c) Insurance and Condemnation Proceeds: Net proceeds from insurance claims or condemnation awards with respect to the Project or Project assets, to the extent such proceeds are not applied to restoration or replacement of the affected assets;
(d) Excess Cash Flow Sweep: A portion of excess cash flow above the 1.40x DSCR threshold is subject to a mandatory sweep and applied to prepayment of the outstanding Loan balance.
Analysis: The mandatory prepayment provisions require careful coordination with the Borrower's insurance program. In particular, insurance proceeds under the builder's risk policy (issued by Commonwealth Specialty Insurance Company, with a policy limit of $42,000,000) and the general liability policy (issued by Pinnacle Mutual Assurance Corp.) must be structured to comply with the Credit Agreement's requirements. Specifically, the policies should provide for loss payee endorsements in favor of BRNB and should include provisions permitting the application of insurance proceeds to Project restoration before any mandatory prepayment of the Loan is triggered. Calderwood & Harkness recommends that Borrower coordinate with Kensington Risk Advisors, LLC (Dana J. Carwell, Lead Broker) to confirm that the insurance program's claims procedures and endorsements are consistent with the Credit Agreement's mandatory prepayment mechanics.
IV. Capital Structure Overview
This section provides a summary of the total sources and uses of funds for the Project, including the relative contributions of debt and equity capital.
A. Sources. The following table summarizes the sources of capital for the $40,000,000 Project:
The total equity contribution of $14,000,000 is allocated between the two equity participants as follows:
• CBR equity: $14,000,000 × 65% = $9,100,000
• Ridgepoint Capital Partners, LP equity: $14,000,000 × 35% = $4,900,000
Ridgepoint Capital Partners, LP holds a 35% minority equity interest in CBR at the parent level. For purposes of the Project, the equity contributions flow through CBR's capital structure, with CBR and Ridgepoint funding their respective pro rata shares of the total equity commitment. The 65/35 split between CBR and Ridgepoint mirrors their existing equity relationship at the parent level.
B. Uses (Summary)
The following table summarizes the anticipated uses of the $40,000,000 in total project funding:
The EPC Contract Price of $31,200,000 represents the largest single component of total project costs. It is important to note that the Equipment Supply Agreement value of $18,400,000 (for the LFP battery modules, power conversion systems, battery management systems, HVAC thermal management systems, and container enclosures) is included within the EPC Contract Price as a pass-through cost. Meridian Power Construction, Inc. has subcontracted the equipment supply scope to Harmon-Dietrich Energy Solutions, LLC ("HDES"). However, the Borrower has entered into a direct Equipment Supply Agreement with HDES, the primary purpose of which is to establish direct contractual privity between Lone Star Storage I, LLC and HDES for warranty and performance guarantee purposes. This direct agreement provides the Borrower (and, by extension, the Lender through the collateral assignment) with direct warranty and performance claims against the equipment supplier, rather than relying solely on flow-through claims under the EPC Agreement.
The network upgrade costs of $2,800,000 are based on the results of the ERCOT Full Interconnection Study completed in August 2022 and are payable by the Borrower to fund the required upgrades to the Western Permian 138 kV Substation and the associated gen-tie line infrastructure necessary for interconnection.
The balance of approximately $6,000,000 in soft costs, development fees, interest during construction, financing costs, legal and advisory fees, insurance premiums, and the funding of required reserve accounts is set forth in detail in the approved construction budget, which is subject to review and approval by the Independent Engineer as a condition precedent to the initial advance.
C. Equity Contribution Timing
The Credit Agreement requires that equity contributions be funded prior to or on a pari passu basis with loan draws. This equity-first or pro rata draw schedule is a standard Lender requirement in construction finance and is designed to ensure that the Lender's loan-to-cost ratio remains at or below 65% throughout the construction period. By requiring the equity sponsors to fund their contributions in advance of or concurrently with each loan draw, BRNB mitigates the risk of a situation in which the Loan has been fully drawn but the equity sponsors have not fully funded their commitments, which would leave the Project undercapitalized in the event of a cost overrun or other adverse development.
Evidence of each equity contribution (in the form of bank statements, wire confirmations, or other documentation reasonably satisfactory to the Lender) is a condition precedent to each loan advance.
V. Conditions Precedent to Initial Advance
All conditions precedent set forth in the Credit Agreement must be satisfied (or waived in writing by BRNB) before the Lender is obligated to fund the first draw under the Credit Facility. The following is a summary of the material conditions precedent, organized by category. This list is not exhaustive, and the Credit Agreement contains additional administrative and procedural conditions that are not separately detailed in this memorandum.
A. Transaction Documents
1. EPC Agreement. Executed Engineering, Procurement, and Construction Agreement between Lone Star Storage I, LLC (as Owner) and Meridian Power Construction, Inc. (as EPC Contractor) — providing for the design, engineering, procurement, construction, testing, and commissioning of the 50 MW / 200 MWh LFP battery energy storage system on a fixed-price, date-certain basis. The Contract Price under the EPC Agreement is $31,200,000. The Guaranteed COD is September 1, 2023. The EPC Agreement must be in form and substance satisfactory to BRNB and its counsel.
2. Ground Lease. Executed Ground Lease between Permian Basin Land Holdings, LP (as Lessor; Marcus W. Eskridge, General Partner) and Lone Star Storage I, LLC (as Lessee) — providing for a 25-year initial term commencing December 1, 2022, with two 5-year renewal options (for a maximum aggregate term of 35 years). The leased premises consist of a 15-acre parcel, being a portion of Survey No. 42, Block 42, T-1-S, T&P RR Co. Survey, Ector County, Texas. The Ground Lease must include customary lender-protective provisions and must be in form and substance satisfactory to BRNB.
3. Subordination, Non-Disturbance and Attornment Agreement (SNDA) / Lessor Lien Waiver. Executed SNDA and Lessor Lien Waiver delivered by Permian Basin Land Holdings, LP in favor of BRNB, subordinating the Lessor's interest in the Ground Lease (and any landlord's lien) to the Lender's security interest and providing for non-disturbance and attornment in favor of the Lender (or any successor to the Borrower's leasehold interest) in the event of a Lessor default under the Ground Lease. This instrument is a required condition for Lender protection and must be in form and substance satisfactory to BRNB and its counsel.
4. Interconnection Agreement. Executed Interconnection Agreement between Lone Star Storage I, LLC and Aldermere & Co. for the Western Permian 138 kV Substation, Ector County, Texas. The interconnection details are as follows: ERCOT Queue No. INR-22-03347; interconnection voltage 138 kV with on-site step-up transformer (34.5 kV to 138 kV); gen-tie line of approximately 1.2 miles from the Project site to the point of interconnection at the substation.
B. Technical / Engineering
5. Independent Engineer's Report. A comprehensive technical report prepared by Norgate Technical Advisors, Inc. (Dr. Phillip S. Reardon, P.E., Lead Engineer), confirming the technical feasibility of the Project, the adequacy of the EPC Agreement (including the Contract Price, scope of work, and construction schedule), the suitability of the equipment specifications (including the LFP battery modules, PCS, BMS, and HVAC systems), the reasonableness of the construction schedule and budget, and the projected performance characteristics of the BESS. The Independent Engineer's report must be in form and substance satisfactory to BRNB and must conclude that the Project can be completed in accordance with the approved budget and schedule and will perform in accordance with the specifications set forth in the EPC Agreement and Equipment Supply Agreement.
C. Insurance.
6. Builder's Risk Insurance. Evidence of builder's risk insurance coverage in an amount not less than the full replacement value of the Project during construction, issued by Commonwealth Specialty Insurance Company, with a policy limit of $42,000,000. The policy must be placed through Kensington Risk Advisors, LLC (Dana J. Carwell, Lead Broker), and must name BRNB as loss payee and additional insured as required by the Credit Agreement.
7. General Liability Insurance. Evidence of commercial general liability insurance coverage, issued by Pinnacle Mutual Assurance Corp., in amounts and with coverage terms satisfactory to BRNB. The policy must be placed through Kensington Risk Advisors, LLC and must name BRNB as additional insured.
8. Insurance Endorsements. All insurance policies required under the Credit Agreement must include endorsements naming BRNB as additional insured and/or loss payee, as applicable, and must contain provisions prohibiting cancellation, non-renewal, or material modification without not less than thirty (30) days' prior written notice to BRNB.
D. Environmental.
9. Phase I Environmental Site Assessment. A Phase I Environmental Site Assessment (ESA) prepared in accordance with ASTM E1527-21 standards by Terranova Environmental Group, Inc. (Karen V. Albrecht, Lead Consultant), located at 4500 Greenville Avenue, Suite 220, Dallas, Texas 75206. The Phase I ESA must conclude that the 15-acre Project site is free of Recognized Environmental Conditions (RECs), Controlled Recognized Environmental Conditions (CRECs), and Historical Recognized Environmental Conditions (HRECs), or that any such conditions identified do not represent a material risk to the Project or the Lender's security interest. BRNB has indicated that a "clean" Phase I ESA (i.e., no RECs identified) is required.
E. Title.
10. Leasehold Title Insurance Policy. A leasehold title insurance policy in the amount of $26,000,000 (matching the aggregate loan commitment), to be issued by Lone Star Abstract & Title Co., located at 312 North Texas Avenue, Odessa, Texas 79761. The policy must insure the Borrower's leasehold interest in the 15-acre Project site and BRNB's mortgage/deed of trust lien thereon, free and clear of all liens, encumbrances, defects, and objections except for Permitted Exceptions as defined in the Credit Agreement and approved by BRNB. The title insurance commitment must be received and approved by BRNB and its counsel prior to Financial Close, with the policy to be issued promptly following recording of the deed of trust.
F. Legal Opinions
11. Borrower's Counsel Opinion. A legal opinion from Calderwood & Harkness LLP (George Trujillo, Partner) addressed to BRNB and delivered at Financial Close, covering the following matters: (a) due organization, valid existence, and good standing of the Borrower and Guarantor under the laws of the State of Texas; (b) power and authority of the Borrower and Guarantor to execute, deliver, and perform the Credit Agreement and related loan documents; (c) due authorization of the Credit Agreement and related loan documents by all necessary corporate/limited liability company action; (d) enforceability of the Credit Agreement and related loan documents against the Borrower and Guarantor in accordance with their respective terms (subject to customary bankruptcy, insolvency, and equitable limitations qualifications); (e) no conflicts with the Borrower's or Guarantor's organizational documents, material agreements, or applicable law; (f) no required governmental approvals or consents (other than those previously obtained) for the execution, delivery, and performance of the loan documents; and (g) perfection and priority of the Lender's security interests in the collateral described in the Security Agreement and Pledge Agreement upon the filing of UCC-1 financing statements with the Texas Secretary of State and the recording of the deed of trust in Ector County.
12. Lender's Counsel Opinion. A standard lender's counsel confirmatory opinion from Archibald, Fenn & Shaw LLP (Robert C. Fenn, Partner) addressed to BRNB, confirming such matters as BRNB and its counsel deem appropriate.
G. Corporate / Organizational
13. Organizational Documents. Certified copies of the certificate of formation and company agreement (or operating agreement) of Lone Star Storage I, LLC, and the certificate of formation (or articles of incorporation), bylaws, and any shareholder or governance agreements of Calloway-Briggs Renewables Inc.
14. Authorizing Resolutions. Board of directors resolutions (in the case of CBR) and member/manager resolutions or consents (in the case of Lone Star Storage I, LLC) authorizing the execution, delivery, and performance of the Credit Agreement and all related loan documents, certified by the secretary or an authorized officer of each entity.
15. Good Standing Certificates. Certificates of good standing (or certificates of existence/status) for CBR and Lone Star Storage I, LLC issued by the Texas Secretary of State, dated within thirty (30) days of Financial Close.
16. Incumbency Certificates. Incumbency certificates identifying the authorized signatories of CBR and Lone Star Storage I, LLC, together with specimen signatures, certified by the secretary or an authorized officer of each entity.
H. Bonding.
17. Performance and Payment Bonds. Evidence of a performance bond and a payment bond, each in the amount of $31,200,000 (100% of the EPC Contract Price), issued by Ironclad Surety Corporation in favor of Lone Star Storage I, LLC under the EPC Agreement. The performance bond guarantees the EPC Contractor's performance of its obligations under the EPC Agreement, and the payment bond guarantees payment by the EPC Contractor to its subcontractors, laborers, and material suppliers. Both bonds must be in form and substance satisfactory to BRNB.
I. Permits.
18. Building Permit. Ector County Building Permit No. BP-2022-04517, issued October 28, 2022, authorizing the construction of the BESS facility on the Project site.
19. Stormwater Permit. Evidence of coverage under the Texas Commission on Environmental Quality (TCEQ) Stormwater General Permit TXR150000, together with a filed and approved Stormwater Pollution Prevention Plan (SWPPP), filed in November 2022. The SWPPP must comply with TCEQ requirements for construction activities disturbing one or more acres of land.
J. Other.
20. Equity Contribution Evidence. Evidence satisfactory to BRNB that the full equity commitment has been funded or that arrangements satisfactory to the Lender are in place for the timely funding of equity contributions on a pro rata basis with loan draws. Specifically, CBR: $9,100,000; Ridgepoint Capital Partners, LP: $4,900,000.
21. Officer's Certificate. A certificate executed by an authorized officer of the Borrower and the Guarantor, confirming (a) that all representations and warranties set forth in the Credit Agreement are true and correct in all material respects as of the date of the initial advance, and (b) that no Default or Event of Default has occurred and is continuing or would result from the making of the initial advance.
22. Approved Construction Budget and Schedule. A detailed construction budget and schedule, approved by the Independent Engineer, setting forth the anticipated timing, sequencing, and cost of all construction activities, including milestones, draw request amounts and timing, and contingency allocations.
23. ERCOT Resource ID. Confirmation of ERCOT Resource ID assignment for the Project (designated LSBESS_01, currently pending final assignment). Final assignment of the Resource ID is required prior to energization and commercial operation, but evidence of the pending status and the queue position must be provided at Financial Close.
VI. Security Package
The Credit Agreement and related security documents provide BRNB with a comprehensive security package, as summarized below. The security package is structured to give the Lender first-priority security interests in substantially all assets of the Borrower and the Project, together with a limited recourse guarantee from the Guarantor during the construction phase.
A. First-Priority Lien on Project Assets
BRNB will hold a first-priority lien on and security interest in substantially all of the Borrower's real and personal property, including:
(a) Deed of Trust / Mortgage on Leasehold Interest. A deed of trust encumbering the Borrower's leasehold interest in the 15-acre Project site in Ector County, Texas, as created by the Ground Lease with Permian Basin Land Holdings, LP. The deed of trust will be recorded in the real property records of Ector County, Texas.
(b) Security Interest in Personal Property. A first-priority security interest in all tangible and intangible personal property of Lone Star Storage I, LLC, including, without limitation: (i) all BESS equipment, including the 50 MW / 200 MWh LFP battery modules (Model HD-LFP-200E), power conversion systems (PCS), battery management systems (BMS), HVAC thermal management systems, container enclosures, the on-site step-up transformer, and all ancillary electrical equipment; (ii) all construction materials, supplies, and spare parts located at the Project site; (iii) all governmental permits, licenses, and approvals; (iv) all deposit accounts, revenue accounts, and reserve accounts of the Borrower; (v) all revenues, receipts, and receivables of the Project; and (vi) all contract rights, including rights under the EPC Agreement, Equipment Supply Agreement, Ground Lease, Interconnection Agreement, and all other Project contracts.
(c) UCC-1 Financing Statements. UCC-1 financing statements will be filed with the Texas Secretary of State to perfect the Lender's security interest in the Borrower's personal property. Calderwood & Harkness will coordinate the preparation and filing of all necessary UCC filings in connection with Financial Close.
B. Collateral Assignment of Project Contracts
The Borrower will execute collateral assignments of its rights, title, and interest in and to the following Project contracts in favor of BRNB:
(a) EPC Agreement — with Meridian Power Construction, Inc.
(b) Equipment Supply Agreement — with Harmon-Dietrich Energy Solutions, LLC
(c) Ground Lease — with Permian Basin Land Holdings, LP
(d) Interconnection Agreement — with Aldermere & Co.
(e) All Insurance Policies — including the builder's risk policy (Commonwealth Specialty Insurance Company), the general liability policy (Pinnacle Mutual Assurance Corp.), and all future operational insurance policies.
Each collateral assignment requires a consent to assignment from the respective counterparty, which must be obtained at or prior to Financial Close as a condition precedent to the initial advance. The consent to assignment provides the counterparty's acknowledgment and agreement that, upon the occurrence of an Event of Default under the Credit Agreement, BRNB (or its designee) may step into the Borrower's position under the assigned contract and exercise the Borrower's rights thereunder.
Analysis: The collateral assignment structure is standard for project finance transactions and is a critical element of the Lender's security package. By obtaining collateral assignments (with counterparty consents) of all material Project contracts, the Lender acquires step-in rights that enable it, upon an Event of Default, to assume the Borrower's position under these contracts and to continue Project operations without interruption. This step-in capability is essential to preserving the going-concern value of the Project in a workout or enforcement scenario and is the primary mechanism through which the Lender's collateral value is maintained. We note that obtaining consents to assignment from all counterparties — particularly Aldermere & Co. (as the transmission and distribution utility) — can require extended lead times, and we recommend initiating the consent process as soon as practicable.
C. Pledge of Membership Interests
CBR will pledge 100% of the membership interests in Lone Star Storage I, LLC to BRNB as additional security for the obligations under the Credit Agreement. The pledge will be documented in a Pledge Agreement executed by CBR in favor of BRNB, and will be perfected by the filing of a UCC-1 financing statement with the Texas Secretary of State (and, if required, by notation on the Borrower's membership interest register).
The pledge of membership interests provides the Lender with an additional enforcement remedy: in the event of an Event of Default, BRNB may foreclose on the pledged membership interests and, by doing so, acquire ownership of the Borrower entity (and, indirectly, all Project assets) without the need for a judicial or non-judicial foreclosure on the real property interests. This remedy can be more expedient and efficient than real property foreclosure in certain circumstances.
D. Completion Guarantee
CBR will deliver a limited recourse completion guarantee (the "Completion Guarantee") in favor of BRNB. The key terms of the Completion Guarantee are as follows:
(a) Scope. CBR guarantees the completion of the Project — specifically, the achievement of Substantial Completion and the Commercial Operation Date — in accordance with the specifications, schedule, and performance criteria set forth in the EPC Agreement and the approved construction budget and schedule.
(b) Cost Overrun Obligation. CBR's obligation under the Completion Guarantee includes the obligation to fund any cost overruns that exceed the aggregate amount of the $26,000,000 Loan and the $14,000,000 equity commitment ($40,000,000 total). In other words, if the Project cannot be completed within the $40,000,000 budget, CBR is obligated to contribute additional equity or subordinated funding sufficient to achieve completion.
(c) Release. The Completion Guarantee releases upon the achievement of COD and the satisfaction of certain post-completion financial metrics, specifically the demonstration that the Project has achieved a target DSCR of 1.40x for a specified period following COD (typically three to six consecutive months, as defined in the Credit Agreement). Upon release of the Completion Guarantee, the Credit Facility converts to a non-recourse project finance loan, with no further recourse to CBR for debt service obligations.
(d) Carve-Outs. Notwithstanding the limited recourse nature of the facility post-completion, the Credit Agreement includes customary "bad boy" guarantees from CBR that survive the release of the Completion Guarantee. These carve-outs provide ongoing recourse to the Guarantor for losses arising from specified acts of fraud, willful misconduct, misrepresentation, environmental contamination caused by the Borrower's actions, and unauthorized transfers of Project assets, among other matters.
Analysis: The limited recourse completion guarantee structure is a standard feature of project finance transactions in the renewable energy and energy storage sectors. The key risk allocation is as follows: during the construction phase, CBR bears completion risk (including cost overrun risk), providing the Lender with recourse to a creditworthy sponsor in the event that the Project cannot be completed as planned. Post-completion, the Loan converts to non-recourse project finance, with the Lender relying solely on the cash flows of the Project and the security package described above for repayment. This structure is appropriate given CBR's financial capacity (approximately $185 million in annual revenues for FY 2021; a diversified portfolio of 1.2 GW of solar and 400 MW of storage assets) and the single-asset, project-specific nature of the Credit Facility. CBR's completion guarantee is credible and, in our view, should be readily acceptable to BRNB.
E. Reserve Accounts
The Credit Agreement requires the establishment and maintenance of the following reserve accounts, all of which will be held at BRNB and subject to account control agreements in favor of the Lender:
(a) Debt Service Reserve Account (DSRA). The DSRA is to be funded at COD in an amount equal to six (6) months of projected debt service (principal and interest). The DSRA provides a liquidity cushion to cover debt service obligations in the event of a temporary shortfall in Project revenues. If the DSRA balance falls below the required minimum, the Borrower is required to replenish it from available cash flows within a specified cure period.
(b) Major Maintenance Reserve. A major maintenance reserve account is to be funded from operating cash flows in accordance with a schedule agreed between the Borrower and the Lender (and reviewed by the Independent Engineer). The major maintenance reserve is intended to fund anticipated periodic replacement and maintenance costs for the BESS equipment, including battery module degradation-related capacity replacements, PCS refurbishment, and other long-life capital expenditures.
(c) Cash Sweep Mechanism. Excess cash flow above the 1.40x DSCR threshold is subject to a mandatory cash sweep, with swept funds applied to accelerated amortization of the outstanding Loan balance. This mechanism ensures that, in periods of strong Project performance, a portion of the excess cash flows is channeled toward debt reduction, thereby reducing the Lender's credit exposure over time.
VII. Representations and Warranties (Summary)
The Credit Agreement includes a comprehensive set of representations and warranties made by the Borrower and the Guarantor as of the date of the Credit Agreement and, with respect to certain representations, as of the date of each loan advance. The following is a summary of the principal representations; the complete text of each representation, including all materiality qualifiers and exceptions, is set forth in Articles IV and V of the Credit Agreement:
• Due organization, valid existence, and good standing of the Borrower and Guarantor under the laws of the State of Texas;
• Corporate/limited liability company power and authority to own property and conduct business; due authorization of the Credit Agreement and related loan documents;
• Enforceability of the Credit Agreement and all related loan documents as legal, valid, and binding obligations of the Borrower and Guarantor, enforceable in accordance with their respective terms;
• No conflicts between the loan documents and the Borrower's or Guarantor's organizational documents, any material agreement to which the Borrower or Guarantor is a party, or any applicable law, rule, regulation, or governmental order;
• Accuracy and completeness of financial statements previously furnished to the Lender, which present fairly in all material respects the financial condition of the Borrower and Guarantor as of the dates indicated;
• No material adverse change in the financial condition, business, operations, or prospects of the Borrower or Guarantor since the date of the most recent financial statements;
• No pending or threatened litigation, proceedings, investigations, or claims that could reasonably be expected to have a material adverse effect on the Borrower, the Guarantor, or the Project;
• Compliance with all applicable environmental laws and regulations; Phase I Environmental Site Assessment results confirm no RECs;
• Good and marketable title to all Project assets; valid and enforceable leasehold interest in the Project site under the Ground Lease, free and clear of all liens and encumbrances except Permitted Exceptions;
• Accuracy and completeness of the Project budget and construction schedule;
• Compliance with ERISA with respect to any employee benefit plans;
• Compliance with all applicable tax laws; timely filing of all required tax returns and payment of all taxes;
• Compliance with all applicable anti-corruption laws (including the U.S. Foreign Corrupt Practices Act) and sanctions laws and regulations;
• Solvency of the Borrower and Guarantor, both before and after giving effect to the transactions contemplated by the Credit Agreement.
VIII. Affirmative and Negative Covenants (Summary)
A. Affirmative Covenants
The Credit Agreement imposes the following affirmative covenants on the Borrower (and, where applicable, the Guarantor), among others:
• Maintain the Borrower's existence and good standing under the laws of the State of Texas;
• Comply in all material respects with all material Project contracts, including the EPC Agreement, the Equipment Supply Agreement, the Ground Lease, and the Interconnection Agreement;
• Maintain all required insurance coverage throughout the term of the Loan, including builder's risk insurance during the construction period and comprehensive property, general liability, and other insurance coverages during the operating period, in each case in amounts and with carriers satisfactory to the Lender;
• Provide periodic financial reporting, including quarterly unaudited financial statements (within 45 days of the end of each fiscal quarter) and annual audited financial statements (within 120 days of the end of each fiscal year), prepared in accordance with GAAP;
• Provide monthly construction progress reports during the construction period, including a description of construction activities completed, a comparison of actual progress and expenditures to the approved budget and schedule, and a certification by the Independent Engineer that construction is progressing in accordance with the approved plans;
• Maintain all governmental permits, licenses, and approvals necessary for the construction and operation of the Project, including the Ector County Building Permit, the TCEQ Stormwater Permit, ERCOT registration and market participation approvals, and any other permits required by federal, state, or local authorities;
• Pay all taxes, assessments, and governmental charges when due, and provide evidence of payment upon request;
• Comply with all applicable laws, rules, and regulations, including environmental laws, ERCOT Protocols, and PUCT regulations;
• Provide prompt written notice to the Lender of any Event of Default, any event that with the passage of time or the giving of notice (or both) would constitute an Event of Default, or any Material Adverse Effect, within the number of business days specified in the Credit Agreement (typically two to five business days);
• Maintain books and records in accordance with GAAP and permit the Lender (and its agents and representatives, including the Independent Engineer) reasonable access to the Project site, books, records, and personnel for inspection purposes, upon reasonable prior notice.
B. Negative Covenants
The Credit Agreement imposes the following negative covenants on the Borrower (and, where applicable, the Guarantor):
• No incurrence of additional indebtedness (including guarantees) without the prior written consent of the Lender, other than Permitted Indebtedness as defined in the Credit Agreement;
• No creation, assumption, or permitting of any liens on Project assets other than Permitted Liens as defined in the Credit Agreement;
• No mergers, consolidations, reorganizations, or dispositions of all or any material portion of the Borrower's assets, without the prior written consent of the Lender;
• No change of control of the Borrower (including any transfer, sale, pledge, or other disposition of membership interests in the Borrower) without the prior written consent of the Lender;
• No amendments or modifications to any material Project contract (including the EPC Agreement, the Equipment Supply Agreement, the Ground Lease, and the Interconnection Agreement) without the prior written consent of the Lender, except for immaterial amendments that do not adversely affect the rights or interests of the Lender;
• No distributions, dividends, or other payments to equity holders of the Borrower until the Project has achieved COD and the Borrower has met both historical and projected DSCR requirements for the applicable measurement period. This distribution lock-up is a standard feature of project finance credit agreements and ensures that operating cash flows are preserved for debt service prior to any equity returns;
• Maintain single-purpose entity (SPE) status for Lone Star Storage I, LLC at all times, including compliance with separateness covenants (such as maintaining separate books and records, bank accounts, and financial statements; not commingling assets with those of any affiliate; holding itself out as a separate entity; and conducting business in its own name);
• No change in the nature of the Borrower's business from the ownership and operation of the Project.
C. Financial Covenants
The Credit Agreement includes the following financial covenants, tested on a quarterly basis following achievement of COD:
• Minimum Debt Service Coverage Ratio (DSCR): Not less than 1.40x, tested quarterly on a trailing twelve-month basis. If the DSCR falls below 1.40x but remains above 1.20x, the Borrower enters a distribution lock-up period (i.e., no distributions to equity holders are permitted). If the DSCR falls below 1.20x, an Event of Default may be triggered after applicable notice and cure periods.
• Distribution DSCR: Distributions to equity holders are only permitted if the trailing twelve-month DSCR and the projected twelve-month DSCR are each at least 1.40x. This dual test (historical and forward-looking) is designed to ensure that distributions are made only when the Project's cash flow performance supports both past and anticipated debt service coverage.
• Debt-to-Equity Ratio: The debt-to-equity ratio of the Project shall not exceed 65:35 at any time. This covenant reinforces the capital structure established at Financial Close and prevents the Borrower from increasing leverage during the term of the Loan.
IX. Events of Default
The Credit Agreement includes a customary set of events of default, the occurrence and continuation of which gives rise to the Lender's right to accelerate the outstanding obligations and exercise its remedies under the security documents. The following is a summary of the key events of default:
• Payment Default. Failure to pay principal, interest, fees, or other amounts when due under the Credit Agreement or any related loan document;
• Representation and Warranty Default. Any representation or warranty made by the Borrower or Guarantor in the Credit Agreement or any related loan document proving to be untrue or misleading in any material respect when made or deemed made;
• Covenant Default. Failure to comply with any covenant in the Credit Agreement, subject to applicable cure periods for non-financial covenants (typically 30 days after written notice from the Lender) and no cure period for financial covenant breaches;
• Cross-Default. Default under any other material indebtedness of the Borrower or Guarantor in excess of a specified threshold amount (typically $500,000 or more);
• Bankruptcy / Insolvency. The filing of a voluntary petition, or the entry of an order for relief upon an involuntary petition, under Title 11 of the United States Code (or any similar federal or state insolvency law) by or against the Borrower, the Guarantor, or any key Project counterparty (including Meridian Power Construction, Inc. and Harmon-Dietrich Energy Solutions, LLC);
• Failure to Achieve COD. Failure to achieve the Commercial Operation Date by the Guaranteed COD date of September 1, 2023, plus a 15-day cure period (i.e., September 16, 2023), as such date may be extended by Force Majeure events in accordance with the EPC Agreement;
• Material Adverse Change. The occurrence of any event, condition, or development that has or could reasonably be expected to have a material adverse effect on (a) the business, assets, operations, financial condition, or prospects of the Borrower or Guarantor, (b) the ability of the Borrower or Guarantor to perform its obligations under the loan documents, or (c) the value of the Lender's security interest in the collateral;
• Termination or Breach of Project Contracts. The termination, repudiation, or material breach of any material Project contract (including the EPC Agreement, the Equipment Supply Agreement, the Ground Lease, or the Interconnection Agreement);
• Loss of Permits. The loss, revocation, suspension, or non-renewal of any governmental permit, license, or approval that is necessary for the construction, operation, or ownership of the Project;
• Judgment Default. The entry of one or more final, non-appealable judgments against the Borrower or Guarantor in an aggregate amount exceeding a specified threshold (typically $500,000);
• Change of Control. Any change of control of the Borrower or Guarantor, as defined in the Credit Agreement, without the prior written consent of the Lender;
• ERISA Event. The occurrence of any ERISA event that could reasonably be expected to result in a material liability of the Borrower or Guarantor;
• Invalidity of Loan Documents or Security Interests. Any loan document ceasing to be in full force and effect, or any security interest created thereunder ceasing to be a valid, perfected, first-priority security interest in the collateral described therein, other than as a result of the Lender's own action or inaction.