PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Margaret "Meg" Calloway, Co-Founder, Chairwoman & Chief Executive Officer Thomas R. Briggs, Co-Founder & President Priya Narayanan, Chief Financial Officer Daniel Estrada, Senior Vice President — Corporate Development Rebecca Whitfield, General Counsel — Calloway-Briggs Renewables Inc.
FROM: James Prentice, Partner, and Megan Chu, Associate — Calderwood & Harkness LLP
DATE: September 29, 2023
RE: Structuring Analysis — Proposed 50/50 Solar Development Joint Venture with Lumen Ridge Infrastructure Partners LLC
Matter No.: 48172.001
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I. Executive Summary
The purpose of this memorandum is to analyze and present alternative legal structures for the proposed joint venture between Calloway-Briggs Renewables Inc. ("CBR") and Lumen Ridge Infrastructure Partners LLC ("Lumen Ridge") to co-develop, construct, finance, own, and operate a portfolio of approximately 1.2 GW (1,200 MW DC) of utility-scale solar photovoltaic projects across Texas, New Mexico, and Arizona. This memorandum is intended to serve as the foundational structuring analysis from which the definitive transaction documents will be prepared.
As more fully discussed below, the parties contemplate the formation of a newly organized Delaware limited liability company, to be named Solstice Plateau Energy Holdings LLC (the "JV" or the "Company"), with total initial equity capitalization of $300,000,000 — comprised of $150,000,000 from each party, representing a 50/50 ownership structure. CBR's initial contribution of $150,000,000 will consist of $60,000,000 in cash together with the contribution of an eight-project solar development portfolio at an agreed valuation of $90,000,000. Lumen Ridge's initial contribution will consist of $150,000,000 in cash.
Based on the analysis set forth in this memorandum, we recommend structuring the JV as a Delaware limited liability company taxed as a partnership for U.S. federal income tax purposes. This structure is the optimal vehicle for the proposed transaction for several compelling reasons. First, it preserves pass-through tax treatment, allowing all items of income, gain, loss, deduction, and credit — including critically important Investment Tax Credits ("ITCs") under Section 48 of the Internal Revenue Code and accelerated depreciation deductions under the Modified Accelerated Cost Recovery System ("MACRS") — to flow directly to CBR and Lumen Ridge at the member level. Second, the Delaware Limited Liability Company Act (the "DLLCA") provides maximum contractual flexibility with respect to governance, distribution mechanics, transfer restrictions, and fiduciary duties, all of which are essential for a carefully calibrated 50/50 joint venture. Third, the structure provides limited liability protection to both members. Fourth, a Delaware LLC taxed as a partnership is overwhelmingly the market-standard structure for renewable energy joint ventures, ensuring familiarity and efficiency in negotiations with Lumen Ridge and its counsel, Haverford, Quinn & Steele LLP.
This memorandum addresses the following topics in detail:
(A) structural alternatives considered and comparative analysis;
(B) recommended entity selection and rationale;
(C) proposed governance framework, including Management Committee composition, reserved matters, officer appointments, and information rights;
(D) capital contributions, additional capital call mechanics, and dilution remedies;
(E) distribution waterfall structure and economic rationale;
(F) management fees payable to CBR;
(G) transfer restrictions and exit provisions, including lock-up, ROFO, tag-along, drag-along, and buy-sell (shotgun) mechanisms;
(H) deadlock resolution procedures;
(I) tax considerations at a summary level, with a detailed tax structuring analysis to follow in a separate memorandum from Leonard Cross, Specialist Partner, Tax, in our New York office; and
(J) regulatory and permitting considerations.
We note that this memorandum reflects our preliminary analysis based on the non-binding term sheet signed September 25, 2023 and our discussions with CBR management to date. As negotiations with Lumen Ridge and its advisors progress, certain terms and structural elements described herein may be refined. We are prepared to begin drafting the definitive LLC Agreement and ancillary documents upon CBR's approval of the structural framework outlined in this memorandum.
II. Background
A. The Parties
Calloway-Briggs Renewables Inc. ("CBR")
CBR is a Texas corporation founded in 2011, with its principal offices located at 2300 Travis Street, Suite 4200, Houston, Texas 77006. CBR is one of the largest privately held independent solar developers in the southern United States. The company currently has a development pipeline of approximately 3.8 GW of solar projects in various stages of development across Texas, New Mexico, Arizona, and Nevada. For the fiscal year ended December 31, 2022, CBR reported revenues of approximately $412 million and EBITDA of approximately $98 million.
CBR was co-founded by Margaret "Meg" Calloway and Thomas R. Briggs, who continue to serve as the company's Chairwoman and Chief Executive Officer and President, respectively. Together, Ms. Calloway and Mr. Briggs control the majority of CBR's outstanding common stock. The company's remaining equity is held by a minority institutional investor, Cascadia Growth Equity Fund III, L.P. ("Cascadia Fund III"), a Portland, Oregon-based growth-equity fund managed by Owen Charbonneau, Managing Director. Cascadia Fund III holds an approximately 22% equity stake in CBR, acquired in connection with a 2018 growth-equity investment. As discussed further in Section II.C below, Cascadia Fund III holds certain consent rights under CBR's existing stockholders' agreement that are relevant to the proposed transaction.
In the proposed JV, CBR will serve as the contributing developer, contributing the eight-project portfolio described below, and will serve as the development and construction manager for the JV's projects on an ongoing basis.
Lumen Ridge Infrastructure Partners LLC ("Lumen Ridge")
Lumen Ridge is a Delaware limited liability company headquartered at 301 Tresser Boulevard, Suite 1400, Stamford, Connecticut 06901. Lumen Ridge is a dedicated renewable-energy infrastructure investment platform formed in 2018, managed by Lumen Ridge Capital Advisors LLC, its affiliated investment adviser. Lumen Ridge currently has approximately $4.2 billion in assets under management, invested across wind, solar, and battery-storage projects throughout North America. Its investor base is comprised primarily of institutional investors, including pension funds, sovereign wealth funds, and insurance companies.
Lumen Ridge is led by Nathaniel "Nate" Forsythe, Co-Founder and Managing Partner, and Carolyn J. Delaney, Partner and Head of Solar Investments. Ms. Delaney has been the primary deal lead for Lumen Ridge in the negotiations leading to the non-binding term sheet.
In the proposed JV, Lumen Ridge will contribute cash equity and will be responsible for arranging project-level debt financing through its established relationships with energy lending institutions.
B. The Proposed Transaction
The proposed transaction involves the formation of a 50/50 joint venture between CBR and Lumen Ridge to co-develop, construct, finance, own, and operate eight utility-scale solar projects totaling approximately 1,200 MW DC across three states: Texas (five projects, approximately 780 MW), New Mexico (two projects, approximately 260 MW), and Arizona (one project, approximately 160 MW). The project portfolio collectively encompasses approximately 14,340 acres of leased and optioned land.
A non-binding Term Sheet setting forth the principal terms and conditions of the proposed JV was signed on September 25, 2023 by Meg Calloway on behalf of CBR and Nate Forsythe on behalf of Lumen Ridge. Prior to the execution of the Term Sheet, the parties entered into a mutual Non-Disclosure Agreement executed on September 18, 2023, pursuant to which confidential information has been exchanged in connection with the parties' preliminary evaluation of the transaction. Formal due diligence is expected to commence on October 2, 2023 and will proceed in parallel with the negotiation of definitive transaction documents.
The eight projects comprising the portfolio to be contributed by CBR to the JV are as follows:
As set forth in the table above, seven of the eight projects are fully permitted. The Brazos Point project in Wharton County, Texas currently has a permit application pending with the applicable county and state authorities; receipt of the Brazos Point permit will be a condition to closing of the JV transaction, as discussed further in Section XII below.
CBR has engaged Ridgeline Barrow & Co. (Marcus Delgado, Managing Director) as its financial advisor in connection with the proposed transaction. Ridgeline Barrow has been engaged to provide a fairness analysis and valuation support with respect to the contributed project portfolio. The engagement letter was executed on September 20, 2023, and the fairness analysis is expected to be delivered in mid-November 2023, with an anticipated valuation range of approximately $87,000,000 to $96,000,000. The agreed portfolio valuation of $90,000,000 for purposes of CBR's initial capital contribution falls within the expected range. Lumen Ridge has separately engaged Whitmore Zanthor Group LLC as its financial advisor.
C. Cascadia Fund III Consent Requirement
Under CBR's existing stockholders' agreement dated as of March 15, 2018 (the "Stockholders' Agreement"), Cascadia Fund III holds a consent right with respect to certain material corporate transactions, including the formation of joint ventures involving the contribution of material company assets. The proposed contribution of the eight-project portfolio — valued at approximately $90,000,000, representing a significant portion of CBR's development pipeline — will trigger this consent requirement.
Accordingly, CBR will need to obtain the affirmative written consent of Cascadia Fund III prior to the signing of definitive agreements for the JV. We understand from Rebecca Whitfield that initial discussions with Owen Charbonneau at Cascadia Fund III regarding the proposed transaction have been preliminary but constructive. We recommend that the formal consent process be initiated promptly and coordinated through Rebecca Whitfield's office, with a target of obtaining consent by mid-November 2023, well in advance of the anticipated early December 2023 signing date. We are available to assist in preparing the consent solicitation materials and any amendments to the Stockholders' Agreement that may be necessary or desirable in connection with the transaction.
III. Analysis of Alternative JV Structures
In evaluating the appropriate legal structure for the proposed JV, we have considered three principal entity forms: (A) a Delaware limited liability company, (B) a Delaware limited partnership, and (C) a Delaware C-corporation. Our analysis of each alternative, together with our recommendation, is set forth below.
A. Delaware Limited Liability Company (Recommended)
A Delaware limited liability company is the recommended structure for the proposed JV. The key attributes of this structure that make it the optimal choice for the CBR-Lumen Ridge transaction are as follows:
Formation and Governing Law. A Delaware LLC is formed by filing a Certificate of Formation with the Delaware Secretary of State and is governed by the Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101 et seq. (the "DLLCA"). Formation is straightforward and can be accomplished within one business day. The DLLCA is widely regarded as the most flexible and well-developed LLC statute in the United States, and the Delaware courts have developed a robust body of case law interpreting and applying its provisions.
Liability Protection. The LLC structure provides robust liability protection to its members. Under the DLLCA, members' liability is limited to their respective capital contributions to the LLC. Members are not personally liable for any debts, obligations, or liabilities of the LLC, whether arising in contract, tort, or otherwise. This liability shield operates automatically and is not dependent on the members' level of participation in the management and control of the LLC — a critical distinction from the limited partnership structure discussed in Section III.B below.
Governance Flexibility. The DLLCA provides maximum contractual freedom to the members to define their governance arrangements. The LLC Agreement is the primary governing document of a Delaware LLC, and the DLLCA expressly permits the members to establish whatever management structure, voting rights, capital call mechanics, distribution provisions, and transfer restrictions they deem appropriate, subject only to very limited mandatory provisions. This degree of contractual freedom is essential for a 50/50 joint venture, where the governance framework must be carefully tailored to balance each party's rights, responsibilities, and protective mechanisms. The DLLCA does not impose the types of mandatory governance requirements (such as annual meetings, formal officer elections, or statutory notice periods) that would apply under the Delaware General Corporation Law. Nor does it impose the structural constraints of the LP Act, which restrict limited partners' ability to participate in management without risk of losing limited liability.
Tax Treatment. A Delaware LLC with two or more members is classified by default as a partnership for U.S. federal income tax purposes under Treasury Regulation § 301.7701-3 (the so-called "check-the-box" regulations). No entity-level election is required to achieve partnership classification; it applies automatically unless the entity affirm atively elects to be treated as a corporation. As a partnership for tax purposes, the LLC pays no entity-level federal income tax. Instead, all items of income, gain, loss, deduction, and credit pass through to the members in accordance with the allocations set forth in the LLC Agreement (subject to compliance with the substantial economic effect rules under Section 704(b) and the regulations thereunder). This pass-through treatment avoids the double taxation that would result under a C-corporation structure and is a fundamental economic requirement for the proposed JV.
ITC and Depreciation Benefits. The pass-through nature of the LLC/partnership structure is particularly critical for the flow-through of two tax benefits that are central to the economics of utility-scale solar development. First, the projects within the JV portfolio are expected to qualify for Investment Tax Credits under Section 48 of the Internal Revenue Code at a base rate of 30%, with the potential for a 40% credit rate if the projects satisfy the domestic-content bonus requirements under the Inflation Reduction Act. Under the partnership structure, these ITCs flow through directly to CBR and Lumen Ridge at the member level, where each can apply them against its own federal income tax liability. Second, the projects are eligible for MACRS 5-year accelerated depreciation, and the JV intends to elect bonus depreciation under Section 168(k) of the Code, generating substantial depreciation deductions in the early years of project operation. These deductions likewise pass through to the members. The ability of each member to directly utilize ITCs and accelerated depreciation deductions is one of the central economic drivers of the proposed JV, and any structure that impedes this pass-through treatment would be fundamentally inconsistent with the transaction economics.
Section 704(c) Flexibility. Because CBR will be contributing the eight-project portfolio to the JV (with a book value of $90,000,000 and a tax basis to CBR of approximately $34,200,000, resulting in $55,800,000 of built-in gain), the JV must address the allocation of this built-in gain under Section 704(c) of the Code. The LLC/partnership structure provides the flexibility to adopt the remedial allocation method under Treasury Regulation § 1.704-3(d), which creates notional tax items to ensure that Lumen Ridge is not burdened with tax consequences arising from CBR's pre-contribution built-in gain. This method is the most commonly employed approach in renewable energy joint ventures involving significant in-kind contributions. A more detailed analysis of the Section 704(c) mechanics will be provided in the separate tax memorandum being prepared by Leonard Cross.
Market Practice. The Delaware LLC taxed as a partnership is the overwhelmingly predominant structure for renewable energy joint ventures in the United States. Both CBR and Lumen Ridge, as well as their respective outside counsel (Calderwood & Harkness LLP for CBR and Haverford, Quinn & Steele LLP for Lumen Ridge), are thoroughly familiar with this framework. Utilizing a market-standard structure will promote efficiency in the negotiation and documentation of the definitive transaction documents and will reduce the potential for disputes arising from unfamiliar or non-standard structural features.
Fiduciary Duties. Under the DLLCA, the fiduciary duties of members and managers of a Delaware LLC may be modified, restricted, or eliminated in the LLC Agreement, subject to the implied covenant of good faith and fair dealing, which may not be eliminated. See 6 Del. C. § 18-1101(c)–(e). This flexibility allows the parties to tailor the fiduciary obligations applicable to the JV to the specific context of a 50/50 joint venture, where each party is simultaneously a co-owner and a self-interested participant with separate business interests, advisory relationships, and portfolio investments. We anticipate that the LLC Agreement will modify the default fiduciary duties to permit each member's representatives on the Management Committee to consider the interests of the appointing member, subject to a reasonable standard of good faith and fair dealing in the performance of their duties to the JV.
B. Delaware Limited Partnership
We considered and ultimately rejected a Delaware limited partnership ("LP") as the structural vehicle for the proposed JV. While an LP provides certain benefits, including partnership tax classification, it presents several significant disadvantages relative to the LLC structure in the context of a 50/50 joint venture.
Formation and GP Liability. A Delaware LP is formed under the Delaware Revised Uniform Limited Partnership Act (6 Del. C. §§ 17-101 et seq.) and requires at least one general partner ("GP") and one or more limited partners. The GP of an LP bears unlimited personal liability for the debts and obligations of the partnership. In order to mitigate this unlimited liability exposure, it would be necessary to form a separate entity — typically an LLC or corporation — to serve as the GP of the LP, with no material assets of its own. This adds an additional layer of entity formation, an additional set of governing documents, and additional ongoing maintenance costs and administrative complexity. In a 50/50 joint venture, the question of which party (or which party's subsidiary) serves as the GP introduces an inherent asymmetry that is inconsistent with the fundamental premise of equal partnership and co-equal control.
Governance Constraints. The LP Act imposes meaningful constraints on the ability of limited partners to participate in the management and control of the partnership. Under the so-called "control rule," a limited partner who participates in the control of the business of the LP may, under certain circumstances, lose its limited liability protection and become personally liable for the obligations of the partnership as if it were a general partner. Although the Delaware LP Act provides a "safe harbor" list of activities that do not constitute participation in control, the scope of permitted limited partner involvement is narrower than the unrestricted management participation available to members of a Delaware LLC. In a 50/50 JV where both parties are expected to be actively involved in governance, strategic decision-making, and operational oversight, this control rule introduces an unnecessary risk and structural limitation.
Tax Treatment. An LP is also classified as a partnership for U.S. federal income tax purposes under the default check-the-box rules, and therefore provides the same pass-through tax treatment as an LLC, including the ability to allocate ITCs, depreciation deductions, and other tax items to the partners. In this respect, the LP is equivalent to the LLC. However, because the LLC achieves the same tax result without the structural disadvantages described above, the LP offers no incremental tax benefit.
Conclusion. The LP structure is inferior to the LLC structure for a 50/50 joint venture due to: (i) the need for a separate GP entity to mitigate unlimited GP liability, adding cost and complexity; (ii) the inherent governance asymmetry between the GP and limited partner roles, which is inconsistent with a 50/50 relationship; and (iii) the restrictions on limited partner management participation under the control rule, which are not present under the DLLCA. We do not recommend the LP structure for this transaction.
C. C-Corporation (Delaware)
We also considered and rejected a Delaware C-corporation as the structural vehicle for the proposed JV. A C-corporation is fundamentally incompatible with the economics of a renewable energy development platform for the following reasons.
Double Taxation. A C-corporation is a separate taxable entity for U.S. federal income tax purposes. Corporate income is subject to tax at the entity level at the current federal corporate tax rate of 21%. When after-tax earnings are distributed to shareholders in the form of dividends, the distributions are taxed again at the shareholder level (currently at qualified dividend rates of up to 20%, plus the 3.8% net investment income tax, for a combined shareholder-level rate of up to 23.8%). This two-tier taxation regime results in a combined effective tax rate on corporate earnings distributed to shareholders of approximately 39.8% (21% + 23.8% on the remaining 79%). By contrast, the partnership structure results in only a single level of tax at the member level. The double-tax burden of the C-corporation structure would fundamentally undermine the after-tax returns of the JV and is inconsistent with the economic assumptions underlying the parties' term sheet.
ITC and Depreciation Trapped at Entity Level. In a C-corporation structure, ITCs and depreciation deductions remain at the corporate entity level and cannot pass through to the shareholders. The corporation would claim the ITCs against its own federal income tax liability, and the accelerated depreciation deductions would reduce corporate taxable income. However, the individual shareholders (CBR and Lumen Ridge) would be unable to utilize these tax benefits directly against their respective tax liabilities from other sources. Given that the ITCs alone — at a 30% base rate applied to an expected total qualifying basis of over $700 million — represent tens of millions of dollars in potential tax benefits to the members, the inability to pass these credits through to the member level eliminates a central economic driver of the JV. Both CBR and Lumen Ridge have sufficient tax capacity to utilize ITCs and depreciation deductions at the member level; trapping these benefits at the corporate level would result in a materially less efficient tax outcome.
Governance Rigidity. A Delaware C-corporation is governed by the Delaware General Corporation Law ("DGCL"), which imposes mandatory requirements with respect to the board of directors, officer appointments, shareholder meetings, record dates, notice periods, fiduciary duties, and other matters that cannot be modified by contract to the same degree as under the DLLCA. While the DGCL provides some flexibility (particularly for closely held corporations), the degree of contractual freedom available under the LLC Agreement of a Delaware LLC is substantially greater. In a 50/50 joint venture, the ability to tailor governance provisions to the specific needs and expectations of the parties is essential, and the DGCL's mandatory requirements would impose constraints that are unnecessary and potentially counterproductive.
Administrative Burden. A C-corporation is subject to various corporate formalities, including annual meetings of shareholders and directors, the maintenance of formal minutes, the election and reelection of officers, and the filing of annual franchise tax reports. While these requirements are not unduly burdensome, they add a layer of administrative overhead that is avoided in the LLC structure, where the level of formality is determined solely by the terms of the LLC Agreement.
Conclusion. The C-corporation structure is not a viable vehicle for the proposed JV due to: (i) the punitive double-taxation regime; (ii) the inability to pass through ITCs and accelerated depreciation to the members; (iii) reduced governance flexibility under the DGCL; and (iv) unnecessary administrative formalities. We strongly do not recommend this structure.
D. Recommendation
For the reasons set forth above, we recommend that Solstice Plateau Energy Holdings LLC be organized as a Delaware limited liability company taxed as a partnership for U.S. federal income tax purposes. This structure provides:
(i) pass-through taxation, with no entity-level federal income tax;
(ii) direct flow-through of Investment Tax Credits and accelerated depreciation deductions to CBR and Lumen Ridge at the member level;
(iii) maximum governance flexibility under the DLLCA, enabling the parties to create a tailored 50/50 management framework through the LLC Agreement;
(iv) limited liability for both members, with no risk associated with management participation (unlike the LP structure);
(v) the ability to modify or eliminate default fiduciary duties, allowing the parties to define appropriate obligations for a 50/50 JV context;
(vi) Section 704(c) flexibility to address the built-in gain on CBR's contributed project portfolio through the remedial allocation method; and
(vii) full alignment with renewable energy industry market practice, promoting negotiation efficiency and documentation consistency.
We are confident that this recommendation will be well-received by Lumen Ridge and its counsel, as it reflects the standard approach in transactions of this type and is consistent with the structural assumptions reflected in the non-binding term sheet.
IV. Proposed Governance Framework
The governance framework for the JV must be carefully structured to reflect the 50/50 ownership relationship, provide each party with meaningful protective rights, and ensure that the JV can be managed efficiently on a day-to-day basis. The following governance provisions are proposed for inclusion in the LLC Agreement.
A. Management Committee
Composition. The JV will be governed by a Management Committee consisting of six (6) members — three (3) designated by CBR and three (3) designated by Lumen Ridge. This equal representation reflects the 50/50 ownership structure and ensures that neither party has a unilateral majority on the committee. Each member shall have the right to remove and replace any of its designees to the Management Committee at any time, with or without cause, upon written notice to the other member.
Chairperson. The Management Committee shall have a Chairperson, whose role shall rotate annually between the CBR designees and the Lumen Ridge designees. CBR shall be entitled to designate the initial Chairperson for the first year of the JV's operations (Year 1 following closing), and the right to designate the Chairperson shall alternate between the members in each subsequent year. The Chairperson shall preside over meetings of the Management Committee, set the agenda for meetings (in consultation with the other member's designees), and serve as the primary point of contact for the JV's officers on matters requiring Management Committee direction. The Chairperson shall not have a casting vote or any enhanced voting authority.
Regular Meetings. The Management Committee shall hold regular meetings on a quarterly basis, at such times and places as shall be determined by the Chairperson in consultation with the designees of the other member. Special meetings of the Management Committee may be called by the Chairperson, by any two Management Committee designees, or by either member, upon reasonable advance notice (which we propose to define as not less than five (5) business days' notice, or such shorter period as may be agreed by both members in exigent circumstances).
Quorum. A quorum for the transaction of business at any meeting of the Management Committee shall require the presence (in person, by telephone, or by video conference) of at least two (2) designees of each member (i.e., at least four (4) of the six (6) Management Committee members, with representation from both sides). No action may be taken at a meeting of the Management Committee at which a quorum is not present. This quorum requirement ensures that neither party can convene a meeting and take action in the absence of meaningful participation by the other party.
Ordinary Matters. Actions on ordinary matters coming before the Management Committee shall require the affirmative vote of a simple majority of the Management Committee members present at a meeting at which a quorum is present (i.e., at least four (4) of six (6) votes). Given the quorum requirement of at least two designees from each member, an affirmative vote of four requires the support of at least one designee from each side, further reinforcing the collaborative nature of the 50/50 governance structure.
B. Supermajority / Reserved Matters
Certain material actions of the JV — designated as "Reserved Matters" — shall require the affirmative vote of not fewer than five (5) of six (6) Management Committee members (representing a supermajority threshold of approximately 83.3%). This supermajority requirement applies to the following Reserved Matters:
(a) approval of the annual operating budget and any material deviations therefrom;
(b) issuance of additional capital calls in excess of $25,000,000 per individual call;
(c) the incurrence, assumption, or guarantee of indebtedness by the JV at the holding-company level (excluding project-level non-recourse debt financing that has been previously authorized by the Management Committee);
(d) the sale, transfer, encumbrance, or other disposition of any project within the portfolio, or any other material asset of the JV;
(e) the admission of any new member to the JV;
(f) any amendment, modification, or waiver of any provision of the LLC Agreement;
(g) the dissolution, winding up, or termination of the JV;
(h) the commencement of any material litigation or the settlement of any claim or action involving amounts in excess of $5,000,000;
(i) the entry into, material amendment, or termination of any power purchase agreement or interconnection agreement; and
(j) the engagement of, or change in, the JV's independent auditor or tax preparer.
Rationale for the 5-of-6 Threshold. In a 50/50 joint venture, the selection of the supermajority threshold for reserved matters requires a careful balancing of protective rights against operational functionality. A true unanimity requirement (6 of 6) would provide maximum protection to each party, as either party could unilaterally block any reserved matter. However, unanimity creates an excessive risk of deadlock, particularly in a long-term development and operating venture where the parties will inevitably encounter situations requiring timely decision-making on material matters. At the other end of the spectrum, a simple majority (4 of 6) would be insufficiently protective, as it would permit one party, with the support of a single designee from the other side, to approve material actions over the objection of the other party's remaining designees.
The 5-of-6 threshold strikes the appropriate balance. Under this threshold, each party retains the ability to block any reserved matter, because each party controls three votes and the threshold requires at least five. At the same time, the 5-of-6 threshold allows for some flexibility in the event that one designee from either side is persuaded to support a particular course of action, reducing the risk that a single recalcitrant designee can hold the JV hostage on a matter that commands broad support. We believe this threshold is consistent with market practice for 50/50 renewable energy joint ventures and anticipate that it will be acceptable to Lumen Ridge.
C. Officers
The day-to-day management and operations of the JV will be overseen by officers appointed by the Management Committee, as follows:
Chief Executive Officer. The CEO of the JV shall be appointed by CBR. The proposed initial CEO is Daniel Estrada, currently Senior Vice President — Corporate Development of CBR. Mr. Estrada will be responsible for the day-to-day management of the JV, including the execution and implementation of directives of the Management Committee, the supervision of the JV's development and construction activities, and the coordination of the JV's relationships with project counterparties, governmental authorities, and other stakeholders. The CEO shall report to the Management Committee and shall not have authority to take any action that constitutes a Reserved Matter without the requisite Management Committee approval.
Chief Financial Officer. The CFO of the JV shall be appointed by Lumen Ridge. The proposed initial CFO is Victor Osei, currently Chief Financial Officer of Lumen Ridge Infrastructure Partners LLC. Mr. Osei will be responsible for the JV's financial management, including the preparation of financial statements and management reports, treasury and cash management functions, coordination with Pennington Clarke LLP (the JV's independent auditor and tax preparer), and coordination with Trident National Bank, N.A. and other project-level lenders with respect to debt financing, covenant compliance, and reporting obligations.
Officer Appointment and Removal. Each appointing member shall have the unilateral right to remove and replace its designated officer at any time, with or without cause, upon written notice to the other member and to the Management Committee. This provision ensures that each party retains full control over its designated officer and can take prompt action to address any performance concerns or personnel changes without requiring the consent or approval of the other party. The LLC Agreement will specify that neither member may appoint or remove the officer designated by the other member.
D. Information Rights and Reporting
Both members shall be entitled to robust information rights to ensure full transparency regarding the JV's operations, financial performance, and project status. The following reporting obligations will be imposed on the JV:
(a) Monthly Financial Statements. Unaudited monthly financial statements (including a balance sheet, income statement, and cash flow statement) to be delivered to each member within thirty (30) days after the end of each calendar month.
(b) Quarterly Management Reports. Comprehensive quarterly management reports, including project-level status updates, budget-to-actual variance analyses, construction progress reports, permitting and interconnection updates, and market and regulatory developments, to be delivered to each member within forty-five (45) days after the end of each fiscal quarter.
(c) Annual Audited Financial Statements. Annual audited financial statements, prepared in accordance with U.S. generally accepted accounting principles, to be delivered to each member within ninety (90) days after the end of each fiscal year. The annual audit will be performed by Pennington Clarke LLP, with Harold Yeung, CPA serving as the Engagement Partner.
(d) Tax Information. Schedule K-1s and any other information necessary for each member to prepare its federal and state income tax returns, to be delivered within seventy-five (75) days after the end of each fiscal year.
In addition to the foregoing periodic reporting obligations, each member shall be entitled to full access to the books, records, and financial information of the JV at reasonable times and upon reasonable notice, including the right to conduct audits or inspections at the member's own expense. This access right shall extend to all project-level books and records maintained by the JV or any subsidiary thereof.
V. Capital Structure
A. Initial Capital Contributions
The initial capitalization of the JV reflects the 50/50 ownership structure, with each party contributing a total value of $150,000,000 to the JV at closing:
CBR's Contribution. CBR will contribute $60,000,000 in cash together with the eight-project solar development portfolio at an agreed valuation of $90,000,000, for a total initial capital contribution of $150,000,000. The in-kind contribution of the project portfolio will be made pursuant to a separate Contribution Agreement, which will set forth the representations, warranties, covenants, and indemnification obligations of CBR with respect to the contributed projects.
The agreed portfolio valuation of $90,000,000 is subject to confirmation through the fairness analysis being prepared by Ridgeline Barrow & Co. (Marcus Delgado, Managing Director). The engagement letter for the fairness analysis was executed on September 20, 2023, and the completed analysis is expected to be delivered in mid-November 2023. Based on our preliminary discussions with Mr. Delgado and his team, the anticipated valuation range for the portfolio is approximately $87,000,000 to $96,000,000, which brackets the agreed $90,000,000 value. We do not anticipate any material issues in connection with the fairness analysis, but we note that any significant deviation from the agreed valuation could require renegotiation of the capital contribution amounts or the cash-to-portfolio ratio.
Lumen Ridge's Contribution. Lumen Ridge will contribute $150,000,000 in cash. Lumen Ridge's capital contribution will be funded from its existing committed capital base, and we understand from discussions with Lumen Ridge's counsel that no additional fund-raising or investor consent will be required for Lumen Ridge to fund its initial contribution.
Total Initial Funded Capital. The aggregate initial funded capital of the JV will be $300,000,000, consisting of $60,000,000 in cash from CBR, $90,000,000 in contributed project assets from CBR, and $150,000,000 in cash from Lumen Ridge. Each member will hold a 50% membership interest in the JV, and each member's initial capital account balance will be $150,000,000.
B. Additional Capital Calls
The LLC Agreement will provide for additional capital calls on a pro-rata 50/50 basis to fund the JV's development, construction, and operational activities beyond the amounts funded at closing. The key parameters of the additional capital call mechanism are as follows:
(a) Maximum Additional Capital. Each member shall be obligated to fund additional capital contributions of up to $200,000,000 per member ($400,000,000 in the aggregate), in addition to the $150,000,000 initial capital contribution, for a total potential equity commitment of $350,000,000 per member.
(b) Approval Threshold. Individual capital calls in amounts up to $25,000,000 may be approved by the CEO with the prior approval of a simple majority of the Management Committee. Capital calls in excess of $25,000,000 per individual call shall require supermajority approval of the Management Committee (5 of 6 votes), as described in Section IV.B above.
(c) Notice Period. Capital call notices shall provide not less than thirty (30) days' advance notice of the required funding date, specifying the amount of the capital call, the purpose for which the funds are required, and the date on which the contribution is due.
(d) Total Potential Equity Capitalization. The total potential equity capitalization of the JV, assuming full utilization of the additional capital call facility, will be $300,000,000 (initial) plus $400,000,000 (additional) = $700,000,000.
Failure to Fund: Dilution Remedy. In the event that a member fails to fund a duly authorized capital call within the specified time period, the non-funding member's percentage interest in the JV shall be subject to dilution. The dilution mechanism will be based on relative capital account balances: the non-funding member's percentage interest shall be reduced in proportion to the shortfall between its actual capital account balance and the capital account balance it would have had if it had fully funded the capital call, measured relative to the fully-funded capital accounts of both members. This dilution remedy is the sole remedy available to the funding member; there shall be no cross-collateralization or call rights on the non-funding member's other assets outside the JV, and the non-funding member shall not be subject to forfeiture or forced sale of its interest. We believe this approach strikes an appropriate balance between incentivizing timely funding and avoiding unduly punitive consequences that could disrupt the JV relationship.
C. Project-Level Debt
In addition to the equity capital contributed by the members, the JV's projects will be financed in part through project-level debt financing. Lumen Ridge, consistent with its role as the JV's capital markets partner, will be responsible for arranging project-level debt financing on behalf of the JV.
The anticipated lead lender is Trident National Bank, N.A. (Patricia Henning, Managing Director, Energy & Infrastructure Finance). Based on preliminary discussions between Lumen Ridge, its financial advisors, and Trident National Bank, the anticipated credit facility is expected to consist of a combination of term loan and revolving construction facilities in an aggregate amount of up to $480,000,000. The anticipated principal terms include:
• Facility type: Senior secured credit facility (term loan + revolving construction facility)
• Amount: Up to $480,000,000
• Tenor: 7-year maturity from closing
• Interest rate: SOFR + 175 basis points per annum
• Recourse: Non-recourse to members; recourse limited to JV assets and project cash flows
• Security: First-priority liens on all project assets, including real property interests, equipment, permits, and project contracts
The non-recourse nature of the project-level debt is a critical structural feature. Neither CBR nor Lumen Ridge will be required to provide personal guarantees or pledge assets outside the JV to support the project-level debt. Lender recourse will be limited to the assets and cash flows of the JV and its project subsidiaries. The detailed terms of the credit facility will be negotiated and documented separately, and we will coordinate with the JV's CFO (Victor Osei) and Lumen Ridge's counsel to ensure that the credit facility terms are consistent with the governance and distribution provisions of the LLC Agreement.
VI. Distribution Waterfall
A. Waterfall Tiers
Distributions of available cash from the JV to CBR and Lumen Ridge will be made in accordance with the following three-tier waterfall:
Tier 1 — Pari Passu to 8.0% IRR. Distributions shall be split 50% to CBR / 50% to Lumen Ridge (pari passu), on a pro-rata basis in proportion to their respective membership interests, until each member has received aggregate distributions sufficient to yield an 8.0% internal rate of return ("IRR") on its total contributed capital (including, in the case of CBR, the $90,000,000 agreed value of the contributed project portfolio).
Tier 2 — Enhanced Split to 12.0% IRR. After each member has achieved the 8.0% IRR threshold under Tier 1, distributions shall be split 60% to CBR / 40% to Lumen Ridge until Lumen Ridge has achieved a 12.0% IRR on its total contributed capital.
Tier 3 — Pari Passu Above 12.0% IRR. After the 12.0% IRR threshold for Lumen Ridge has been achieved under Tier 2, all subsequent distributions shall be split 50% to CBR / 50% to Lumen Ridge (pari passu).
B. Rationale
The distribution waterfall is designed to reflect the distinct contributions and roles of each party in the JV, while maintaining the overall 50/50 partnership framework.
The enhanced Tier 2 split of 60/40 in favor of CBR recognizes and compensates CBR for three principal value drivers that CBR brings to the JV beyond its financial capital contribution: (i) the contribution of the development pipeline itself, which represents years of greenfield development work, site identification, land acquisition, permitting, and interconnection — activities that have been completed by CBR at its own risk and expense prior to the formation of the JV; (ii) CBR's ongoing role as the development and construction manager for the JV's projects, which requires the deployment of CBR's experienced development, engineering, and project management teams; and (iii) CBR's deep operational expertise in utility-scale solar development in the Texas, New Mexico, and Arizona markets, including established relationships with local permitting authorities, utilities, and offtakers.
The Tier 2 enhanced split functions as CBR's "promote" or incentive economics within the waterfall structure. This approach was selected in preference to a traditional carried interest or promote structure (under which one party would receive a disproportionate allocation of profits after a preferred return threshold) because the waterfall approach is simpler to implement, easier to model, and more transparent in operation. It also avoids the accounting and tax complexities that can arise from a separate promote interest or incentive allocation.
We note that no separate promote, carried interest, or incentive allocation is being proposed. CBR's enhanced economics are delivered through two channels: the Tier 2 waterfall split and the management fees described in Section VII below. We believe this dual-channel approach provides CBR with fair compensation for its role as the contributing developer and operating partner while remaining within market norms for 50/50 renewable energy joint ventures.
IRR Measurement. For purposes of the waterfall calculations, IRR shall be measured on each member's aggregate capital contributions, including the $90,000,000 agreed value of CBR's in-kind portfolio contribution. The IRR calculation shall be based on actual cash flow dates (using the XIRR methodology), with the date of each capital contribution and the date of each distribution serving as the relevant data points. The precise mechanics of the IRR calculation, including the treatment of management fees, tax distributions, and interim cash flows, will be documented in detail in an exhibit to the LLC Agreement.
C. Distribution Timing
Distributions shall be made on a quarterly basis, within forty-five (45) days after the end of each fiscal quarter, subject to the following:
(a) the Management Committee shall have the discretion to establish and maintain reasonable reserves for working capital, anticipated operating expenses, debt service obligations, and budgeted capital expenditures;
(b) distributions shall be made only to the extent of available cash (as defined in the LLC Agreement) after giving effect to such reserves;
(c) the Management Committee shall have the authority to approve special distributions outside the quarterly cycle in the event of material liquidity events (such as a project sale or refinancing); and
(d) all distributions shall be subject to compliance with the covenants and distribution restrictions of any project-level debt financing.
The LLC Agreement will include provisions for tax distributions — i.e., minimum distributions to each member in an amount sufficient to fund the member's estimated tax liability arising from its allocable share of the JV's taxable income. Tax distributions shall be made quarterly (or more frequently as needed to align with estimated tax payment deadlines) and shall be credited against the member's share of subsequent regular distributions under the waterfall.
VII. Management Fees
In addition to the enhanced Tier 2 distribution split described in Section VI above, CBR will receive management fees from the JV in compensation for its role as the development and construction manager for the JV's project portfolio. These fees will be structured as follows:
A. Development Management Fee
CBR will receive an annual development management fee equal to 1.5% of aggregate capital deployed by the JV. At full initial deployment of the $300,000,000 in initial equity capital, this fee would equal $4,500,000 per year (1.5% × $300,000,000). As additional capital is deployed through capital calls, the fee base will increase proportionally.
The development management fee will be paid from JV funds as an operating expense of the JV, prior to the calculation of distributable cash available for distributions under the waterfall. The fee is intended to cover CBR's overhead costs and personnel expenses associated with ongoing development activities, including permitting, interconnection queue management, land management, environmental compliance, power purchase agreement negotiation and execution, and community and governmental relations.
The fee shall be payable quarterly in arrears, within thirty (30) days after the end of each fiscal quarter, based on the average aggregate capital deployed during the quarter. The specific definition of "aggregate capital deployed" will be set forth in the Development and Construction Management Agreement and will include all equity capital contributed by the members that has been invested in or allocated to specific project activities (as distinguished from cash held in reserve or in escrow).
B. Construction Management Fee
CBR will also receive a construction oversight fee equal to 3.0% of total hard construction costs for each project within the portfolio, payable as construction milestones are achieved.
The estimated total hard construction costs across the entire eight-project portfolio are approximately $720,000,000. Accordingly, the potential aggregate construction management fee across the portfolio is $21,600,000 (3.0% × $720,000,000). This aggregate amount will be earned and paid over the multi-year construction period for the portfolio, on a project-by-project basis as each project progresses through construction. Milestone payments will be tied to defined construction milestones (such as commencement of site preparation, foundation completion, module installation commencement, mechanical completion, and commercial operation date) that will be specified in the Development and Construction Management Agreement.
The construction management fee will likewise be treated as an operating expense of the JV, paid from JV funds prior to the calculation of distributable cash. This fee is intended to compensate CBR for the deployment of its construction management team, including project managers, engineers, procurement specialists, and quality assurance/quality control personnel, as well as CBR's assumption of construction management risk and its coordination of third-party EPC contractors.
C. Documentation
The development management fee and the construction management fee will be documented in a separate Development and Construction Management Agreement (the "DCMA") between CBR (or a CBR subsidiary designated for this purpose) and Solstice Plateau Energy Holdings LLC. The DCMA will be negotiated and executed concurrently with the LLC Agreement and will form part of the integrated suite of closing documents.
The DCMA will include, among other things, the following provisions:
(a) detailed performance standards and benchmarks for CBR's development and construction management activities;
(b) reporting obligations, including monthly construction progress reports, budget-to-actual cost comparisons, and schedule adherence reports;
(c) provisions for the Management Committee's oversight and approval of material construction decisions, change orders, and cost overruns;
(d) termination provisions, including the right of the JV (acting through the Management Committee with the requisite vote) to terminate CBR as development and construction manager for cause (e.g., material breach, gross negligence, willful misconduct, or prolonged failure to meet performance standards) and to engage a replacement manager;
(e) indemnification obligations of CBR to the JV for losses arising from CBR's gross negligence or willful misconduct in the performance of its management duties; and
(f) insurance requirements applicable to CBR's management activities.
VIII. Transfer Restrictions and Exit Provisions
The LLC Agreement will include comprehensive transfer restrictions and exit provisions to protect the stability of the JV relationship, provide the parties with orderly exit mechanisms, and ensure that neither party is forced into a partnership with an unwanted third party. The proposed provisions are as follows:
A. Lock-Up Period
For a period of three (3) years from the Closing Date (the "Lock-Up Period"), neither member may transfer, sell, assign, pledge, encumber, or otherwise dispose of all or any portion of its membership interest in the JV. Assuming a closing in Q1 2024 (targeted for approximately February 20, 2024), the Lock-Up Period would extend through approximately February 20, 2027.
The lock-up is subject to customary exceptions, including:
(a) transfers to an affiliate of the transferring member (provided that the affiliate assumes all obligations under the LLC Agreement and that the transferring member remains liable for its affiliate's obligations);
(b) transfers for estate planning or internal restructuring purposes (such as transfers to a family trust, family limited partnership, or wholly-owned subsidiary); and
(c) involuntary transfers by operation of law (subject to a right of first offer in favor of the non-transferring member).
The three-year lock-up is designed to ensure stability during the critical early years of the JV's operations, when the portfolio will be in active development and construction. During this period, continuity of ownership and alignment of interests are essential to the successful execution of the JV's business plan.
B. Right of First Offer (ROFO)
After the expiration of the Lock-Up Period, a member wishing to transfer all or any portion of its membership interest (the "Transferring Member") must first offer the interest to the other member (the "Non-Transferring Member") at fair market value, pursuant to the following right of first offer procedure:
(a) The Transferring Member shall deliver a written notice (the "Offer Notice") to the Non-Transferring Member, setting forth the Transferring Member's intent to transfer its interest, the percentage interest proposed to be transferred, and the fair market value at which the Transferring Member proposes to sell the interest.
(b) Fair market value shall be determined by an independent appraiser mutually agreed upon by the members. If the members are unable to agree on an appraiser within fifteen (15) days of the delivery of the Offer Notice, either member may request that the American Arbitration Association ("AAA") appoint a qualified independent appraiser with experience in the valuation of renewable energy assets and development platforms.
(c) The Non-Transferring Member shall have a period of sixty (60) days from the delivery of the Offer Notice (the "ROFO Exercise Period") to accept or decline the offer. Acceptance must be in writing and must be unconditional.
(d) If the Non-Transferring Member accepts the offer, the closing of the purchase shall occur within sixty (60) days of acceptance on terms and conditions consistent with the Offer Notice and such other customary terms as the parties may agree.
(e) If the Non-Transferring Member declines the offer or fails to respond within the sixty (60)-day ROFO Exercise Period, the Transferring Member shall be free to sell the offered interest to a third party, provided that (i) the sale is consummated within one hundred eighty (180) days of the expiration of the ROFO Exercise Period, (ii) the terms and conditions of the third-party sale are no more favorable to the third-party purchaser than the terms offered to the Non-Transferring Member, and (iii) the third-party purchaser satisfies customary eligibility requirements (including regulatory compliance and absence of conflicts).
C. Tag-Along and Drag-Along Rights
Tag-Along Rights. The LLC Agreement will include standard mutual tag-along rights. If a member (the "Selling Member") negotiates and agrees upon the terms of a sale of all or any portion of its membership interest to a third-party purchaser, the other member (the "Tag-Along Member") shall have the right, but not the obligation, to participate in the sale by selling a proportionate share of its own membership interest to the same third-party purchaser, on the same terms and conditions as the Selling Member's sale. The tag-along right is exercisable by the Tag-Along Member within thirty (30) days of receipt of written notice from the Selling Member of the proposed third-party sale. If the Tag-Along Member exercises its tag-along right, the Selling Member shall condition the closing of the third-party sale on the third-party purchaser's purchase of the Tag-Along Member's pro-rata share. This provision protects each member against the risk of being stranded in the JV with an unfamiliar or undesirable new co-venturer without the opportunity to exit on equivalent terms.
Drag-Along Rights. The LLC Agreement will include mutual drag-along rights, subject to the following limitations:
(a) Drag-along rights shall not be available during the first five (5) years of the JV's operations (i.e., not before approximately February 20, 2029, assuming a Q1 2024 closing).
(b) Exercise of the drag-along right shall require the agreement of both members. Neither member may unilaterally invoke the drag-along right to compel a sale of the entire JV.
(c) If both members agree to invoke the drag-along right, both members shall be obligated to sell their respective interests to the third-party purchaser on the same terms and conditions.
The drag-along mechanism is intended to provide the members with an efficient exit path for the sale of the entire JV to a single purchaser in circumstances where both members desire a full exit. By requiring the agreement of both members, the drag-along right cannot be used as a tool to force a reluctant co-venturer out of the JV.
D. Buy-Sell (Shotgun) Provision
As an additional exit mechanism and deadlock resolution tool, the LLC Agreement will include a buy-sell (or "shotgun") provision, available after the expiration of the three (3)-year Lock-Up Period (i.e., after approximately February 20, 2027):
(a) Either member (the "Initiating Member") may trigger the buy-sell mechanism by delivering a written notice to the other member (the "Responding Member") that specifies a per-unit price at which the Initiating Member is willing to purchase the Responding Member's entire membership interest or to sell its own entire membership interest.