CONFIDENTIAL — FOR DISCUSSION PURPOSES ONLY
NON-BINDING TERM SHEET
Proposed Solar Development Joint Venture
September 25, 2023
Parties:
Calloway-Briggs Renewables Inc. ("CBR")
Lumen Ridge Infrastructure Partners LLC ("Lumen Ridge" and, together with CBR, the "Parties")
Prepared by:
Calderwood & Harkness LLP, counsel to CBR 1000 Louisiana Street, Suite 5500 Houston, TX 77002
This Term Sheet sets forth the principal terms on which the Parties propose to form a joint venture as described herein. Except as expressly set forth in Section 15 (Exclusivity), Section 16 (Confidentiality), Section 17 (Expenses), and Section 18 (Governing Law) below, this Term Sheet is non-binding and does not create any legally enforceable obligations. This Term Sheet is intended solely to serve as a basis for the negotiation of definitive agreements, and the terms set forth herein are subject to the satisfactory completion of due diligence and the negotiation, execution, and delivery of mutually acceptable definitive documentation. Capitalized terms used herein but not otherwise defined shall have the meanings ascribed to them herein or as the context may require.
1. Parties
1.1 Calloway-Briggs Renewables Inc. ("CBR")
Full Legal Name: Calloway-Briggs Renewables Inc.
Entity Type: Corporation organized and existing under the laws of the State of Texas.
Principal Office: 2300 Travis Street, Suite 4200, Houston, TX 77006.
Business Description: CBR is a privately held renewable energy development company headquartered in Houston, Texas. CBR is engaged in the development, construction, and operation of utility-scale solar energy generation facilities across the southern and southwestern United States. As of the date hereof, CBR has approximately 3.8 gigawatts ("GW") of solar energy projects in various stages of development, permitting, construction, and operation across the states of Texas, New Mexico, Arizona, and Nevada. For the fiscal year ended December 31, 2022, CBR reported total revenues of approximately $412 million and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately $98 million. CBR's management team has extensive experience in renewable energy project development, land acquisition, permitting, engineering, procurement, construction, and operations, and has successfully brought over 2.1 GW of solar capacity to commercial operation since the company's founding.
Representative Signatory: Margaret "Meg" Calloway, Co-Founder, Chairwoman & Chief Executive Officer.
1.2 Lumen Ridge Infrastructure Partners LLC ("Lumen Ridge")
Full Legal Name: Lumen Ridge Infrastructure Partners LLC.
Entity Type: Limited liability company organized and existing under the laws of the State of Delaware.
Principal Office: 301 Tresser Boulevard, Suite 1400, Stamford, CT 06901.
Business Description: Lumen Ridge is a dedicated renewable-energy infrastructure investment platform managed by Lumen Ridge Capital Advisors LLC, a registered investment adviser. Lumen Ridge has approximately $4.2 billion in assets under management, deployed across wind, solar, and battery-storage projects throughout North America. Lumen Ridge focuses on direct equity investments in development-stage and construction-stage renewable energy assets and has a demonstrated track record of arranging and structuring project-level financing for large-scale energy infrastructure. Lumen Ridge's investment professionals bring deep expertise in energy finance, tax-equity structuring, power-purchase agreement negotiation, and infrastructure asset management.
Representative Signatory: Nathaniel "Nate" Forsythe, Co-Founder & Managing Partner.
2. Transaction Overview
CBR and Lumen Ridge propose to form a 50/50 joint venture (the "Joint Venture" or "JV") for the purpose of co-developing, constructing, financing, owning, and operating a portfolio of utility-scale solar energy generation projects located in Texas and the Desert Southwest region of the United States (collectively, the "Projects" and each individually, a "Project"). The Joint Venture will be structured as a newly formed Delaware limited liability company to be named Solstice Plateau Energy Holdings LLC (as further described in Section 3 below).
As its principal contribution to the Joint Venture, CBR will contribute its existing pipeline of eight (8) permitted-but-unbuilt solar development projects having an aggregate nameplate capacity of approximately 1,200 megawatts direct current ("MW DC") (the "Project Portfolio"), together with a cash contribution as described in Section 4 below. CBR will also serve as the exclusive development and construction manager for all Joint Venture projects pursuant to a separate Development and Construction Management Agreement to be negotiated between the Parties.
As its principal contribution to the Joint Venture, Lumen Ridge will contribute cash equity in the amount described in Section 4 below and will be responsible for arranging non-recourse project-level debt financing for the Joint Venture's projects, as further described in Section 6 below.
The Parties intend that the Joint Venture will create a combined platform that leverages CBR's development and construction management capabilities and established project pipeline together with Lumen Ridge's financial resources, capital markets expertise, and experience in structuring and managing renewable energy investments. The Parties anticipate that the Joint Venture will, following successful construction and commissioning of the Project Portfolio, produce long-term contracted cash flows supported by power purchase agreements ("PPAs") with creditworthy utility and corporate offtakers, while also positioning the Parties to pursue additional development opportunities in the region on a co-investment basis.
3. Joint Venture Entity
Name: Solstice Plateau Energy Holdings LLC (the "Company" or the "JV Entity").
Entity Type: Limited liability company to be newly formed and organized under the Delaware Limited Liability Company Act (6 Del. C. § 18-101 et seq.).
Tax Classification: The Company will be classified as a partnership for United States federal income tax purposes under the default classification rules applicable to domestic limited liability companies with two or more members pursuant to Treasury Regulations Section 301.7701-3. The Company shall not file an entity-level election on IRS Form 8832 to be classified as an association taxable as a corporation. The Parties acknowledge that the partnership classification is fundamental to the economic and tax structuring of the Joint Venture, including the allocation of tax benefits, depreciation deductions, and investment tax credits as described in Section 10 below.
Registered Agent: Peachtree Corporate Services, Inc., 1209 Orange Street, Suite 300, Wilmington, DE 19801.
Principal Business Office: The Company's principal business office will be located at 2300 Travis Street, Suite 4210, Houston, TX 77006, in proximity to CBR's principal office and the operational management of the Project Portfolio.
Ownership: The membership interests in the Company will be held as follows:
• CBR: 50% of the outstanding membership interests.
• Lumen Ridge: 50% of the outstanding membership interests.
The rights, obligations, and economic entitlements of the members will be governed by a Limited Liability Company Agreement of the Company (the "LLC Agreement") to be negotiated and executed by the Parties in connection with the closing of the transactions contemplated hereby (the "Closing").
4. Capitalization and Capital Contributions
4.1 Total Equity Commitment
The aggregate equity commitment of the Parties to the Company shall be Three Hundred Million Dollars ($300,000,000), to be contributed as follows:
• CBR Commitment: One Hundred Fifty Million Dollars ($150,000,000).
• Lumen Ridge Commitment: One Hundred Fifty Million Dollars ($150,000,000).
Each Party's aggregate equity commitment represents its proportionate share (50%) of the total equity capitalization of the Company as of Closing, ensuring that each Party has an equal economic stake in the Joint Venture from inception.
4.2 Initial Capital Contributions at Closing
At the Closing, each Party shall make its initial capital contribution to the Company as follows:
CBR: CBR shall contribute (i) Sixty Million Dollars ($60,000,000) in cash, by wire transfer of immediately available funds, plus (ii) all of CBR's right, title, and interest in and to the Project Portfolio (consisting of the eight solar development projects described in Section 5 below, together with all associated permits, land leases, interconnection agreements, environmental studies, engineering and design work product, and other project-related assets and contracts), which Project Portfolio shall be valued at Ninety Million Dollars ($90,000,000) for purposes of CBR's capital contribution, for a total initial capital contribution by CBR of One Hundred Fifty Million Dollars ($150,000,000). The contribution of the Project Portfolio shall be effected by assignment and transfer of all applicable project-level entities, contracts, and assets to the Company or to one or more wholly-owned subsidiaries of the Company, pursuant to a Contribution Agreement to be executed at Closing (the "Contribution Agreement").
Lumen Ridge: Lumen Ridge shall contribute One Hundred Fifty Million Dollars ($150,000,000) in cash, by wire transfer of immediately available funds to the Company's designated bank account.
Aggregate Initial Funded Capital: Upon completion of the foregoing contributions, the Company will have aggregate initial funded capital of Three Hundred Million Dollars ($300,000,000).
4.3 Project Portfolio Valuation
The Parties have agreed that, for purposes of CBR's in-kind capital contribution described in Section 4.2 above, the Project Portfolio shall be valued at Ninety Million Dollars ($90,000,000) (the "Agreed Valuation"). The Agreed Valuation takes into account the development stage of each Project, the estimated replacement cost of the development work completed to date, the value of secured land positions, the permit status of each Project, the proximity and availability of transmission interconnection, and the projected economics of each Project upon completion and commencement of commercial operations.
The Agreed Valuation shall be supported by a fairness analysis to be prepared and delivered by Ridgeline Barrow & Co., CBR's financial advisor, in connection with the Closing. Based on preliminary discussions, the Parties understand that the Ridgeline Barrow valuation range for the Project Portfolio is anticipated to be approximately Eighty-Seven Million Dollars ($87,000,000) to Ninety-Six Million Dollars ($96,000,000), and the Agreed Valuation of $90,000,000 represents the approximate midpoint of such anticipated range. Lumen Ridge shall have the right, at its own expense, to engage its own financial advisor (Whitmore Zanthor Group LLC or another advisor of its choosing) to conduct an independent valuation of the Project Portfolio, and any material disagreement regarding the valuation shall be resolved by the Parties in good faith prior to Closing.
4.4 Additional Capital Calls
The LLC Agreement will include customary provisions permitting the Company to make additional capital calls on the members, on a 50/50 pro-rata basis in proportion to their respective membership interests, to fund future development, construction, operational, and other capital needs of the Company and the Projects. The following terms shall apply to additional capital calls:
(a) Maximum Additional Capital Calls. The aggregate additional capital contributions that may be called from each member shall not exceed Two Hundred Million Dollars ($200,000,000) per member, for a total aggregate additional capital commitment of Four Hundred Million Dollars ($400,000,000).
(b) Approval Requirement. Any additional capital call shall require the supermajority approval of the Management Committee, which shall require the affirmative vote of at least five (5) of the six (6) members of the Management Committee, as further described in Section 7.2 below.
(c) Notice and Funding Period. Capital call notices shall be delivered to each member no less than thirty (30) business days prior to the required funding date, and shall specify in reasonable detail the purpose for which the additional capital is being called and the amount required from each member.
(d) Total Potential Equity Capitalization. The total potential equity capitalization of the Company shall be the sum of the initial capital contributions ($300,000,000) and the maximum additional capital contributions ($400,000,000), for a total of up to Seven Hundred Million Dollars ($700,000,000).
4.5 Failure to Fund
The LLC Agreement shall contain customary dilution mechanics applicable in the event that a member fails to fund all or any portion of a duly approved capital call within the required funding period. In the event of a failure to fund:
(a) The non-contributing member's membership interest in the Company shall be diluted on a formula basis, which formula shall be determined in the LLC Agreement and shall take into account the proportionate shortfall of the non-contributing member relative to the total capital called and the cumulative capital contributions of each member.
(b) The contributing member shall have the right, but not the obligation, to fund the non-contributing member's shortfall amount, and any such additional contribution shall be treated as an additional capital contribution by the contributing member, resulting in a corresponding increase in the contributing member's membership interest and a corresponding decrease in the non-contributing member's membership interest.
(c) The specific dilution formula, cure periods, default interest provisions, and other remedies for failure to fund shall be negotiated in good faith and set forth in the LLC Agreement.
5. Project Portfolio
CBR will contribute to the Company its existing pipeline of eight (8) utility-scale solar development projects with an aggregate nameplate DC capacity of approximately 1,200 MW (the "Project Portfolio"). The Project Portfolio is summarized in the table below:
The geographic distribution of the Project Portfolio is as follows:
• Texas: Five (5) Projects with an aggregate nameplate capacity of approximately 780 MW DC (Red Mesa Solar I, Red Mesa Solar II, Cimarron Flats, Lone Star Prairie, and Brazos Point), located across Pecos, Crockett, Webb, and Wharton Counties. These projects are situated within the Electric Reliability Council of Texas ("ERCOT") service territory and benefit from favorable solar irradiance profiles, available transmission capacity, and supportive local permitting environments.
• New Mexico: Two (2) Projects with an aggregate nameplate capacity of approximately 260 MW DC (Sangre del Sol I and Sangre del Sol II), both located in Doña Ana County on land controlled under Bureau of Land Management ("BLM") leases. These projects are situated within the Western Electricity Coordinating Council ("WECC") region and have secured BLM right-of-way grants and associated federal environmental clearances.
• Arizona: One (1) Project with a nameplate capacity of approximately 160 MW DC (Sonoran Ridge), located in Pinal County on privately leased land. This project is located in the Arizona Public Service ("APS") and Salt River Project ("SRP") service territories and benefits from among the highest solar irradiance levels in the continental United States.
Seven (7) of the eight (8) Projects in the Project Portfolio have received all material federal, state, and local permits and approvals necessary for construction and operation. The one remaining project, Brazos Point (Wharton County, TX; 120 MW DC), has a permit application currently pending before the applicable local authorities. Receipt of the outstanding Brazos Point permit shall be a condition to Closing, as further described in Section 12 below. CBR represents that it is not aware of any circumstances that would reasonably be expected to prevent the timely issuance of the Brazos Point permit, and CBR shall use commercially reasonable efforts to obtain such permit prior to the target Closing date.
Each Project in the Project Portfolio is held through a separate project-level limited liability company wholly owned by CBR. At Closing, CBR shall contribute 100% of the membership interests in each such project-level entity to the Company (or to a designated subsidiary thereof) pursuant to the Contribution Agreement. The contributed assets shall include all land leases, easements, rights-of-way, interconnection agreements, permits, environmental impact assessments, engineering and design studies, equipment procurement agreements (if any), and other project-related contracts, documents, and intangible assets associated with each Project.
6. Project-Level Debt Financing
Lumen Ridge shall be primarily responsible for arranging non-recourse project-level debt financing for the Joint Venture's Projects. The Parties anticipate the following general terms for such financing, which remain subject to negotiation with potential lending institutions and final approval by the Management Committee:
(a) Anticipated Credit Facility. A senior secured project finance facility consisting of a term loan and a revolving construction facility, with an aggregate committed amount of up to Four Hundred Eighty Million Dollars ($480,000,000).
(b) Lender. To be arranged by Lumen Ridge through its relationships with commercial banks, development finance institutions, and institutional lenders active in the renewable energy project finance market. Lumen Ridge shall lead the lender selection process, provided that the final selection of the lead arranger(s) and agent bank shall be subject to the approval of the Management Committee.
(c) Anticipated Terms. The Parties currently anticipate a seven (7)-year facility with an interest rate at the Secured Overnight Financing Rate ("SOFR") plus 175 basis points per annum, subject to adjustment based on market conditions at the time of commitment. Customary project finance covenants, reserve requirements, and cash sweep mechanisms are expected to apply.
(d) Non-Recourse. The project-level debt financing shall be non-recourse to the members of the Company. The debt shall be secured solely by the assets of the Company's project-level subsidiaries, including project revenue, equipment, real property interests, permits, and other project-related collateral, and no member shall be required to provide a corporate guaranty, personal guaranty, or credit support with respect to the project-level indebtedness (other than customary completion guaranties and equity contribution agreements that may be required by lenders during the construction phase).
(e) Financing Costs. All upfront and ongoing financing costs, including arrangement fees, commitment fees, legal fees, and administrative agent fees, shall be borne by the Company and funded from available equity or operating cash flows.
The Parties acknowledge that the terms of the project-level debt financing described above are indicative only and are subject to change based on market conditions, lender requirements, and the final terms negotiated with the selected lending group. Lumen Ridge shall use commercially reasonable efforts to arrange financing on terms at least as favorable as those described above. The incurrence of any project-level indebtedness shall require the supermajority approval of the Management Committee as a Reserved Matter under Section 7.2 below.
7. Governance
7.1 Management Committee
The Company shall be governed by a Management Committee (the "Management Committee") in accordance with the terms and provisions to be set forth in the LLC Agreement. The Company shall be a "manager-managed" limited liability company under the Delaware LLC Act. The Management Committee shall have the following composition:
(a) The Management Committee shall consist of six (6) members (each, a "Committee Member").
(b) CBR shall have the right to appoint three (3) Committee Members, and Lumen Ridge shall have the right to appoint three (3) Committee Members. Each Party may remove and replace any Committee Member appointed by such Party at any time, with or without cause, upon written notice to the other Party.
(c) The Management Committee shall have a Chairperson, whose role shall rotate annually between the Parties. CBR shall designate the initial Chairperson for the first year following Closing (Year 1), and Lumen Ridge shall designate the Chairperson for the second year (Year 2), and so forth on an alternating annual basis thereafter. The Chairperson shall preside over meetings of the Management Committee and shall have such other duties and responsibilities as may be set forth in the LLC Agreement, but shall not have any tie-breaking or casting vote.
(d) The Management Committee shall meet at least quarterly, and special meetings may be called by any Committee Member upon reasonable advance notice. Meetings may be held in person or by videoconference or telephone.
7.2 Voting; Supermajority Matters
Each Committee Member shall be entitled to one (1) vote on all matters submitted to the Management Committee. Routine matters of day-to-day management and operations shall be decided by a simple majority vote of the Management Committee (i.e., the affirmative vote of at least four (4) of six (6) Committee Members). The following matters (each, a "Reserved Matter") shall require the supermajority approval of at least five (5) of six (6) Committee Members:
(a) Approval of the Company's annual budget, including capital expenditure and operating expense budgets for each fiscal year.
(b) Capital calls on the members in excess of Twenty-Five Million Dollars ($25,000,000) in the aggregate in any twelve (12)-month period.
(c) The incurrence, assumption, or guaranty of any indebtedness by the Company or any of its subsidiaries, whether at the Company level or at the project level.
(d) The sale, disposition, transfer, or encumbrance of any Project or material asset of the Company or any of its subsidiaries (other than dispositions in the ordinary course of business below a de minimis threshold to be established in the LLC Agreement).
(e) The admission of any new member to the Company or the issuance of any additional membership interests or equity securities.
(f) Any amendment, modification, restatement, or waiver of any provision of the LLC Agreement.
(g) The dissolution, liquidation, or winding up of the Company, or the filing of any voluntary petition for bankruptcy, insolvency, or reorganization.
The specific list of Reserved Matters and the applicable voting thresholds shall be set forth in detail in the LLC Agreement.
7.3 Officers. The Company shall have the following executive officers, who shall serve at the direction of the Management Committee and shall be responsible for the day-to-day management and operations of the Company:
(a) Chief Executive Officer ("CEO"). The CEO shall be appointed by CBR. The initial CEO shall be Daniel Estrada, currently Senior Vice President — Corporate Development of CBR. The CEO shall have primary responsibility for the overall management, strategic direction, and operations of the Company, subject to the oversight and authority of the Management Committee.
(b) Chief Financial Officer ("CFO"). The CFO shall be appointed by Lumen Ridge. The initial CFO shall be Victor Osei, currently Chief Financial Officer of Lumen Ridge. The CFO shall have primary responsibility for the financial management, accounting, reporting, treasury, and capital markets activities of the Company, subject to the oversight and authority of the Management Committee.
The appointment, removal, and replacement of officers shall be subject to the applicable provisions of the LLC Agreement. Additional officers may be appointed by the Management Committee as the Parties may agree.
7.4 Deadlock Resolution
In the event that the Management Committee is unable to reach a decision on any matter requiring its approval (a "Deadlock"), the Parties shall utilize the following escalation process to resolve the Deadlock:
(a) Negotiation Period. The matter in dispute shall be referred to designated senior principals of each member (initially, Meg Calloway on behalf of CBR and Nate Forsythe on behalf of Lumen Ridge) for a period of sixty (60) days, during which such senior principals shall negotiate in good faith to resolve the Deadlock.
(b) Mediation. If the Deadlock remains unresolved at the conclusion of the sixty (60)-day negotiation period, the matter shall be submitted to non-binding mediation for a period of thirty (30) days, conducted by a mutually agreed mediator with experience in renewable energy transactions or, failing agreement on a mediator, a mediator selected in accordance with the mediation rules of the International Chamber of Commerce ("ICC").
(c) Binding Arbitration. If the Deadlock remains unresolved following mediation, the matter shall be submitted to final and binding arbitration conducted under the Rules of Arbitration of the International Chamber of Commerce. The arbitration shall be seated in Houston, Texas. The arbitral tribunal shall consist of three (3) arbitrators, with one arbitrator appointed by each Party and the third arbitrator (who shall serve as the presiding arbitrator) appointed by agreement of the two Party-appointed arbitrators or, failing such agreement, by the ICC. The decision of the arbitral tribunal shall be final and binding upon the Parties and may be enforced in any court of competent jurisdiction.
In addition to the foregoing dispute resolution mechanism, the Parties shall have the right to invoke the buy-sell (shotgun) provision described in Section 11.4 as an alternative Deadlock resolution mechanism, subject to the terms and conditions thereof.
8. Development and Construction Management
CBR shall serve as the exclusive development and construction manager for all Projects within the Joint Venture portfolio, pursuant to a Development and Construction Management Agreement (the "DCMA") to be negotiated and executed by CBR (or a designated affiliate thereof) and the Company at or prior to Closing. The DCMA shall set forth the scope of CBR's development and construction management responsibilities, performance standards, reporting requirements, and the terms of CBR's compensation, among other matters. The Parties have agreed to the following principal commercial terms for the DCMA:
Development Management Fee: CBR shall be entitled to receive an annual development management fee equal to 1.5% per annum of the aggregate capital deployed by the Joint Venture. At full initial deployment of the Company's $300,000,000 in equity capital, the annual development management fee would be $4,500,000 per year. The development management fee shall compensate CBR for ongoing project development activities, including land management, permitting, environmental compliance, interconnection management, offtaker and PPA negotiations, community relations, and other pre-construction development services. The fee shall accrue and be payable quarterly in arrears and shall be adjusted from time to time to reflect the actual amount of aggregate capital deployed by the Company.
Construction Management Fee: CBR shall be entitled to receive a construction management fee equal to 3.0% of total hard construction costs for each Project. Based on the Parties' preliminary estimates, the aggregate total hard construction costs for the eight Projects in the Project Portfolio are anticipated to be approximately $720,000,000, resulting in an estimated aggregate construction management fee across the full portfolio of approximately $21,600,000. The construction management fee shall compensate CBR for all construction management services, including engineering and procurement oversight, contractor management, schedule management, quality assurance and quality control, commissioning support, and related activities. The construction management fee for each Project shall be payable in installments tied to construction milestones to be specified in the DCMA.
The DCMA shall also address CBR's obligations with respect to construction budgets and schedules, change order management, performance guaranties, liquidated damages (if applicable), insurance requirements, indemnification, termination rights, and transition of development and construction management responsibilities in the event of CBR's default or termination. The specific terms of the DCMA shall be negotiated in good faith between the Parties and shall be consistent with market practice for development and construction management agreements in the utility-scale solar sector.
9. Distribution Waterfall
Distributable cash of the Company (as defined in the LLC Agreement) shall be distributed to the members in accordance with the following distribution waterfall:
Tier 1 — Pari Passu Return of Capital and Preferred Return. First, all distributable cash shall be distributed pari passu to CBR and Lumen Ridge (50% / 50%) until each member has received cumulative distributions sufficient to provide such member with an internal rate of return ("IRR") of 8.0% per annum on such member's aggregate contributed capital.
Tier 2 — Enhanced CBR Split. Second, after each member has achieved an 8.0% IRR on contributed capital, all additional distributable cash shall be distributed 60% to CBR and 40% to Lumen Ridge, until such time as Lumen Ridge has received cumulative distributions sufficient to provide Lumen Ridge with an IRR of 12.0% per annum on its aggregate contributed capital.
Tier 3 — Pari Passu Split Above 12% IRR. Third, after Lumen Ridge has achieved a 12.0% IRR on its aggregate contributed capital, all additional distributable cash shall be distributed pari passu to CBR and Lumen Ridge (50% / 50%).
The Parties acknowledge and agree that there shall be no promote or carried interest payable to either member. CBR's enhanced economics in the Joint Venture are captured through (i) the development management fee and construction management fee payable under the DCMA, as described in Section 8 above, and (ii) the enhanced Tier 2 distribution split described above. The distribution waterfall and the calculation of IRR thresholds shall be set forth in detail in the LLC Agreement, including the methodology for calculating IRR, the treatment of in-kind contributions, the timing of distributions, and any minimum cash reserve or distribution restriction covenants that may be required under the terms of the project-level debt financing.
Distributions shall be made no less frequently than quarterly, subject to the availability of distributable cash and compliance with any applicable restrictions under the LLC Agreement, project-level credit agreements, or applicable law.
10. Tax Matters
The Parties have agreed to the following principal tax-related terms for the Joint Venture, which shall be reflected in the LLC Agreement:
Partnership Representative. CBR shall serve as the "partnership representative" of the Company (within the meaning of Section 6223 of the Internal Revenue Code of 1986, as amended (the "Code")) for each taxable year. CBR shall act through its designated individual, Priya Narayanan, Chief Financial Officer of CBR, or such other individual as CBR may designate from time to time. The partnership representative shall have the authority and responsibilities set forth in Section 6223 of the Code and the applicable Treasury Regulations, subject to the consultation and information rights of Lumen Ridge to be specified in the LLC Agreement. CBR, in its capacity as partnership representative, shall not settle, compromise, or otherwise resolve any audit or proceeding with the Internal Revenue Service or other taxing authority without the prior written consent of Lumen Ridge, which consent shall not be unreasonably withheld, conditioned, or delayed.
Section 704(c) Method. The Company shall apply the "remedial allocation method" described in Treasury Regulations Section 1.704-3(d) with respect to the contributed property (i.e., the Project Portfolio). The Project Portfolio has an agreed book value for capital account purposes of $90,000,000 (equal to the Agreed Valuation) and an anticipated aggregate adjusted tax basis of approximately $34,200,000, resulting in aggregate built-in gain of approximately $55,800,000. Under the remedial allocation method, the Company will make remedial allocations of items of income, gain, loss, and deduction to the members in order to eliminate the distortions caused by the "ceiling rule" limitations that would otherwise apply to the allocation of tax items with respect to the contributed property.
Depreciation. The Projects in the Project Portfolio are expected to qualify as "energy property" eligible for cost recovery under the Modified Accelerated Cost Recovery System ("MACRS") with a five (5)-year recovery period under Section 168 of the Code. The Company intends to elect bonus depreciation under Section 168(k) of the Code with respect to all eligible property placed in service during the applicable taxable year, to the maximum extent permitted by law. The Parties acknowledge that the availability and percentage of bonus depreciation under Section 168(k) may be subject to phase-down in future taxable years in accordance with the applicable statutory schedule.
Investment Tax Credits. The Projects are expected to qualify for the investment tax credit ("ITC") under Section 48 of the Code at the base rate of 30% of the eligible basis of each Project. To the extent that the Projects satisfy the domestic content requirements under applicable guidance, the ITC rate may be increased to 40% (reflecting the 10-percentage-point domestic-content bonus credit adder). The ITCs shall be allocated 50% to CBR and 50% to Lumen Ridge, consistent with their respective 50/50 ownership interests in the Company, subject to compliance with the applicable partnership allocation rules under Sections 704(b) and 704(c) of the Code and the regulations thereunder. The Parties shall cooperate in good faith to structure the acquisition, construction, and placement in service of Project assets in a manner that maximizes the available ITCs and other tax benefits.
Tax Protection Agreement. In connection with the Closing, the Company shall enter into a Tax Protection Agreement (the "Tax Protection Agreement") with CBR providing for a seven (7)-year tax protection with respect to the approximately $55,800,000 of built-in gain attributable to the contributed Project Portfolio assets. During the seven (7)-year protection period (commencing on the Closing date), the Company shall not, without CBR's prior written consent, engage in any taxable disposition (including any sale, exchange, or other taxable transfer) of any contributed property that would result in the recognition by CBR of all or any portion of the built-in gain. In the event of a taxable disposition of contributed property during the protection period, the Company shall make a "make-whole" payment to CBR in an amount equal to the incremental federal, state, and local income tax liability incurred by CBR (and its direct and indirect equity holders, as applicable) as a result of the recognition of built-in gain triggered by such disposition, calculated at assumed tax rates and using methodology to be specified in the Tax Protection Agreement. The Tax Protection Agreement shall contain customary exceptions for dispositions required by law, involuntary conversions, and other force majeure events, as well as provisions regarding CBR's obligation to mitigate its tax liability through available elections and structuring alternatives.
11. Transfer Restrictions and Exit Provisions
11.1 Lock-Up Period
Neither member shall directly or indirectly sell, transfer, assign, pledge, encumber, or otherwise dispose of (each, a "Transfer") all or any portion of its membership interest in the Company during the three (3)-year period commencing on the Closing date (the "Lock-Up Period"), except for Transfers to Permitted Transferees. For purposes of this Section 11.1, "Permitted Transferees" shall include (i) wholly-owned subsidiaries or affiliates of a member, (ii) in the case of Lumen Ridge, funds or investment vehicles managed by Lumen Ridge Capital Advisors LLC or its affiliates, and (iii) in the case of CBR, any trust or estate planning vehicle controlled by or for the benefit of the founders of CBR. Any Transfer to a Permitted Transferee shall be subject to the requirement that the Permitted Transferee agree in writing to be bound by the terms of the LLC Agreement.
11.2 Right of First Offer (ROFO)
Following the expiration of the Lock-Up Period, any member that desires to Transfer all or any portion of its membership interest in the Company (the "Transferring Member") shall first offer such interest to the non-transferring member (the "Non-Transferring Member") on the following terms:
(a) The Transferring Member shall deliver a written notice (the "ROFO Notice") to the Non-Transferring Member setting forth the Transferring Member's bona fide intention to Transfer its membership interest and the material terms of the proposed Transfer, including the proposed price and other material economic terms.
(b) The fair market value of the membership interest proposed to be transferred shall be determined by an independent appraiser mutually selected by the Parties (or, if the Parties cannot agree, selected in accordance with the procedures set forth in the LLC Agreement). The cost of the independent appraisal shall be borne equally by the Parties.
(c) The Non-Transferring Member shall have a period of sixty (60) days following receipt of the ROFO Notice and the independent appraisal report (the "ROFO Exercise Period") to elect to purchase the Transferring Member's interest at the fair market value determined by the independent appraiser, on the terms set forth in the ROFO Notice.
(d) If the Non-Transferring Member does not elect to purchase the Transferring Member's interest within the ROFO Exercise Period, the Transferring Member shall be free to consummate a Transfer of such interest to a bona fide third party at a price and on terms no more favorable to the third party than those offered to the Non-Transferring Member, subject to the tag-along rights described in Section 11.3 below. Any such third-party Transfer must be consummated within one hundred eighty (180) days following the expiration of the ROFO Exercise Period; otherwise, the ROFO process must be reinitiated.
11.3 Tag-Along / Drag-Along
Tag-Along Rights. At all times following the expiration of the Lock-Up Period, each member shall have standard mutual tag-along rights. In the event that a member proposes to Transfer all or any portion of its membership interest to a bona fide third-party purchaser (after compliance with the ROFO procedure described in Section 11.2), the non-transferring member shall have the right to participate in such Transfer on a pro-rata basis, at the same price per unit and on the same terms and conditions as the transferring member.
Drag-Along Rights. Drag-along rights shall be available only after the fifth (5th) anniversary of the Closing date and shall require the agreement of both members. In the event that both members agree to exercise drag-along rights in connection with a proposed sale of 100% of the membership interests in the Company or all or substantially all of the Company's assets to a bona fide third-party purchaser, each member shall be obligated to participate in such sale on the same terms and conditions. For the avoidance of doubt, no drag-along right may be exercised unilaterally by either member.
11.4 Buy-Sell (Shotgun) Provision
Following the expiration of the Lock-Up Period (i.e., after the third (3rd) anniversary of the Closing date), either member may invoke a buy-sell (commonly referred to as a "shotgun" or "Russian roulette") provision as a mechanism to resolve a Deadlock or to provide a definitive exit from the Joint Venture. The buy-sell provision shall operate as follows:
(a) Initiation. The initiating member (the "Offeror") shall deliver a written notice to the other member (the "Offeree") setting forth a per-unit price at which the Offeror is willing either to purchase the Offeree's entire membership interest or to sell the Offeror's entire membership interest (the "Offer Price").
(b) Election. The Offeree shall have a period of forty-five (45) days following receipt of the buy-sell notice to elect, by written notice to the Offeror, either (i) to sell its entire membership interest to the Offeror at the Offer Price, or (ii) to purchase the Offeror's entire membership interest at the Offer Price.
(c) Default Election. If the Offeree fails to deliver a timely election notice, the Offeree shall be deemed to have elected to sell its entire membership interest to the Offeror at the Offer Price.
(d) Closing. The closing of the buy-sell transaction shall occur within sixty (60) days following the Offeree's election (or deemed election), subject to the receipt of any required regulatory approvals and third-party consents.
The specific mechanics, representations and warranties, indemnification obligations, and other terms applicable to the buy-sell provision shall be set forth in the LLC Agreement.
12. Conditions to Closing
The obligation of each Party to consummate the transactions contemplated by this Term Sheet and the definitive agreements shall be subject to the satisfaction or waiver of the following conditions precedent at or prior to Closing:
(a) Definitive Agreements. The negotiation, execution, and delivery of mutually acceptable definitive transaction documents, including, without limitation: (i) the Limited Liability Company Agreement of Solstice Plateau Energy Holdings LLC (the LLC Agreement); (ii) the Contribution Agreement, pursuant to which CBR will contribute the Project Portfolio to the Company; (iii) the Development and Construction Management Agreement (the DCMA); (iv) the Tax Protection Agreement; and (v) an Escrow Agreement governing the deposit and release of any escrowed funds.
(b) Project Permits. Receipt of all material permits, licenses, and governmental approvals for the Project Portfolio, including, without limitation, receipt of the outstanding permit for the Brazos Point project (Wharton County, TX). Seven of the eight Projects have received all material permits as of the date hereof; the Brazos Point permit is currently pending and must be obtained prior to Closing.
(c) HSR Act Clearance. Expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), with respect to the transactions contemplated hereby. The Parties anticipate that an HSR Act filing will be required in light of the size of the transaction and shall cooperate in making such filing and obtaining clearance as promptly as practicable.
(d) Cascadia Consent. Receipt of the written consent of Cascadia Growth Equity Fund III, L.P. ("Cascadia"), which holds an approximately 22% equity stake in CBR, to the transactions contemplated hereby, to the extent required under the terms of CBR's existing stockholders' agreement. CBR shall use commercially reasonable efforts to obtain such consent in a timely manner and shall keep Lumen Ridge reasonably informed of the status of its discussions with Cascadia.
(e) Due Diligence. Completion by each Party of satisfactory due diligence on the other Party and on the Project Portfolio, as further described in Section 13 below.
(f) Legal Opinions and Certificates. Delivery by each Party of (i) customary legal opinions of counsel as to due organization, authority, enforceability, and such other matters as are customary in transactions of this type; (ii) an officer's certificate certifying as to the accuracy of representations and warranties and compliance with covenants as of the Closing date; (iii) a secretary's certificate certifying as to organizational documents, resolutions, and incumbency; and (iv) certificates of good standing (or equivalent) from the applicable state of organization and any other jurisdictions in which such Party is qualified to do business.
(g) No Material Adverse Change. No material adverse change shall have occurred in the business, assets, financial condition, operations, permits, or regulatory status of the Project Portfolio or any individual Project since the date of this Term Sheet. The definition of "material adverse change" shall be negotiated and set forth in the definitive agreements.
The foregoing list of closing conditions is indicative and not exhaustive. Additional conditions precedent may be identified during the due diligence process and in the course of negotiating the definitive agreements.
13. Due Diligence
Each Party shall have the right to conduct customary due diligence on the other Party and on the Project Portfolio. Due diligence shall commence promptly following execution of this Term Sheet and shall be conducted in accordance with the following terms:
(a) Scope. Due diligence shall cover, among other things, the following areas: (i) corporate and organizational matters of each Party, including formation documents, governance agreements, capitalization, and material contracts; (ii) real property matters, including all land leases, easements, rights-of-way, title reports, surveys, and encumbrances related to the Project sites; (iii) environmental matters, including Phase I and Phase II environmental site assessments, environmental impact statements, NEPA compliance (for BLM-leased Projects), and endangered species assessments; (iv) permits and governmental approvals, including zoning, conditional use permits, building permits, and utility interconnection approvals; (v) material contracts, including power purchase agreements (PPAs), interconnection agreements, equipment supply agreements, and any construction or operations contracts; (vi) tax matters, including the tax basis and structure of the contributed assets, ITC eligibility, and any pending or threatened tax audits or disputes; (vii) insurance, including existing coverage and claims history; and (viii) litigation, including any pending, threatened, or anticipated claims, disputes, or proceedings related to the Project Portfolio or either Party.
(b) Due Diligence Period. The Parties anticipate that due diligence will require approximately sixty (60) days from the date hereof. Each Party shall use commercially reasonable efforts to make available to the other Party and its advisors all information, documents, and access reasonably requested in connection with due diligence, subject to the confidentiality obligations set forth in Section 16 below and the terms of the Mutual Non-Disclosure Agreement.
(c) Virtual Data Room. CBR shall establish and maintain a virtual data room containing documents and information related to the Project Portfolio, CBR's corporate organization, and such other matters as Lumen Ridge may reasonably request. Lumen Ridge shall provide to CBR such documents and information regarding Lumen Ridge's organization, financial condition, and investment platform as CBR may reasonably request.
(d) Site Visits. Lumen Ridge and its representatives shall have the right to conduct site visits to each of the Project sites, subject to reasonable advance notice and coordination with CBR and compliance with all applicable safety and access requirements.
The Parties acknowledge that the completion of satisfactory due diligence by each Party is a condition to Closing, and that either Party may, in its sole discretion, determine that the results of due diligence are unsatisfactory, in which case such Party may terminate discussions in accordance with Section 19 below without liability (other than with respect to the binding provisions of this Term Sheet).
14. Regulatory Approvals
The Parties have identified the following regulatory considerations related to the proposed transactions:
Hart-Scott-Rodino Act. An HSR Act filing with the U.S. Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice will be required in connection with the formation of the Joint Venture. The Parties shall make such filing promptly following execution of this Term Sheet and shall cooperate in good faith in seeking early termination of the applicable waiting period. Each Party shall bear its own HSR Act filing fees and related costs. The Parties do not anticipate that the proposed transaction will raise material antitrust concerns, but each Party shall use its best efforts to obtain HSR clearance as expeditiously as possible.
FERC. No filing with or approval by the Federal Energy Regulatory Commission ("FERC") is expected to be required in connection with the transactions contemplated hereby. The Projects are expected to be qualifying facilities exempt from certain FERC regulatory requirements under the Public Utility Regulatory Policies Act of 1978 ("PURPA"), and neither the formation of the Joint Venture nor the contribution of the Project Portfolio is expected to trigger any FERC filing obligation.
State PUC. No state public utility commission approvals are expected to be required. The Projects will sell their output under negotiated power purchase agreements with wholesale counterparties and will not engage in the retail sale of electricity. Accordingly, the Projects are not expected to be subject to retail rate regulation or franchise requirements imposed by state public utility commissions in Texas, New Mexico, or Arizona.
CFIUS. Review by the Committee on Foreign Investment in the United States ("CFIUS") is not applicable to the proposed transactions, as neither CBR nor Lumen Ridge is a "foreign person" within the meaning of Section 721 of the Defense Production Act of 1950, as amended, and no foreign person is anticipated to acquire a direct or indirect interest in the Joint Venture in connection with the transactions contemplated hereby.
The Parties shall cooperate in good faith to identify and obtain any additional regulatory approvals or third-party consents that may be necessary or advisable in connection with the proposed transactions.
15. Exclusivity [BINDING]
This Section 15 is intended to be legally binding upon the Parties.
From the date hereof through the earlier of (a) the execution of definitive agreements governing the transactions contemplated by this Term Sheet and (b) December 31, 2023 (such period, the "Exclusivity Period"), CBR shall not, and shall cause its directors, officers, employees, agents, advisors, and other representatives not to, directly or indirectly, (i) solicit, initiate, encourage, or facilitate any inquiry, proposal, or offer from any third party relating to the sale, transfer, assignment, contribution, joint development, or other disposition of the Project Portfolio or any individual Project within the Project Portfolio, or any equity interest in any entity that directly or indirectly holds any Project within the Project Portfolio, (ii) engage in, continue, or participate in any discussions or negotiations with any third party with respect to any such transaction, (iii) provide any non-public information to any third party in connection with any such transaction, or (iv) enter into any agreement, letter of intent, term sheet, or other arrangement (whether binding or non-binding) with any third party with respect to any such transaction. CBR shall promptly notify Lumen Ridge if CBR or any of its representatives receives any unsolicited inquiry, proposal, or offer from any third party with respect to the Project Portfolio during the Exclusivity Period.
Lumen Ridge acknowledges and agrees that CBR's ongoing business operations that are unrelated to the Project Portfolio, including CBR's development, construction, and operation of solar energy projects that are not part of the Project Portfolio, are not restricted by this Section 15, and nothing herein shall prevent CBR from conducting its business in the ordinary course with respect to such other projects and activities.
16. Confidentiality [BINDING]
This Section 16 is intended to be legally binding upon the Parties.
The terms and existence of this Term Sheet, and all discussions, negotiations, correspondence, and information exchanged between the Parties in connection herewith, are and shall remain confidential and subject to the terms of the Mutual Non-Disclosure Agreement between CBR and Lumen Ridge dated September 18, 2023 (the "NDA"). The provisions of this Section 16 are in addition to, and shall not limit or supersede, the terms and conditions of the NDA, which shall remain in full force and effect in accordance with its terms.
Neither Party shall issue any press release, public statement, or public announcement regarding this Term Sheet, the proposed Joint Venture, or the transactions contemplated hereby, or make any disclosure of the terms hereof to any third party (other than such Party's directors, officers, employees, legal counsel, financial advisors, accountants, and other advisors who have a need to know such information in connection with the transactions contemplated hereby and who are bound by obligations of confidentiality), without the prior written consent of the other Party. Notwithstanding the foregoing, either Party may make disclosures required by applicable law, regulation, or legal process, provided that the disclosing Party shall, to the extent reasonably practicable and legally permissible, provide the other Party with prompt written notice of such required disclosure and cooperate with the other Party in seeking a protective order or other appropriate remedy to limit such disclosure.
17. Expenses [BINDING]
This Section 17 is intended to be legally binding upon the Parties.
Each Party shall bear its own costs and expenses (including, without limitation, the fees and expenses of legal counsel, financial advisors, accountants, consultants, and other advisors) incurred in connection with the negotiation, preparation, and execution of this Term Sheet, the due diligence process, the negotiation and preparation of definitive agreements, and the consummation of the transactions contemplated hereby, whether or not the proposed transactions are ultimately consummated. Neither Party shall have any obligation to reimburse or indemnify the other Party for any such costs or expenses under any circumstances.
The Parties' respective principal advisors in connection with the proposed transactions are as follows:
• CBR's Legal Counsel: Calderwood & Harkness LLP, 1000 Louisiana Street, Suite 5500, Houston, TX 77002.
• CBR's Financial Advisor: Ridgeline Barrow & Co.
• Lumen Ridge's Legal Counsel: Haverford, Quinn & Steele LLP.
• Lumen Ridge's Financial Advisor: Whitmore Zanthor Group LLC.
18. Governing Law [BINDING]
This Section 18 is intended to be legally binding upon the Parties.
This Term Sheet (including the binding provisions hereof set forth in Sections 15, 16, 17, and this Section 18) shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflict-of-laws principles thereof that would result in the application of the laws of any other jurisdiction. Each Party irrevocably submits to the exclusive jurisdiction of the federal and state courts located in the State of Delaware for the purpose of any action, suit, or proceeding arising out of or relating to the binding provisions of this Term Sheet, and each Party waives any objection to venue or inconvenient forum in connection therewith.
19. Non-Binding Nature
Except for the provisions of Section 15 (Exclusivity), Section 16 (Confidentiality), Section 17 (Expenses), and Section 18 (Governing Law), each of which is expressly intended to be legally binding upon the Parties, this Term Sheet is a statement of the Parties' current intentions with respect to the proposed Joint Venture and does not create any legally binding or enforceable obligations on the part of either Party. This Term Sheet is not intended to constitute, and shall not be construed as constituting, an agreement to negotiate, an agreement to agree, or a commitment to enter into definitive agreements, and no Party shall have any claim against the other Party for breach of this Term Sheet (other than with respect to the binding provisions set forth herein) by reason of the failure to reach agreement on, or execute, definitive agreements.
The Parties' respective obligations with respect to the proposed Joint Venture shall arise only upon the negotiation, execution, and delivery of mutually acceptable definitive transaction agreements, including, without limitation, the LLC Agreement, the Contribution Agreement, the DCMA, the Tax Protection Agreement, and such other agreements as the Parties may determine to be necessary or appropriate. Until such definitive agreements have been duly executed and delivered by both Parties, neither Party shall have any obligation to consummate any transaction, and either Party may terminate discussions and negotiations at any time, for any reason or no reason, without any liability to the other Party (other than with respect to the binding provisions of this Term Sheet, which shall survive any such termination in accordance with their respective terms).
Nothing in this Term Sheet shall be deemed to establish a partnership, joint venture, agency, or fiduciary relationship between the Parties prior to the execution and delivery of the definitive agreements. Neither Party shall have any authority to bind or commit the other Party in any manner whatsoever except as may be expressly set forth in the binding provisions of this Term Sheet.
20. Anticipated Timeline
The Parties currently anticipate the following timeline for the proposed transactions. The dates set forth below are targets only and are not binding upon either Party. Actual timing may vary based on the progress of due diligence, regulatory approvals, negotiations, and other factors.
The Parties shall use commercially reasonable efforts to adhere to the foregoing timeline, but acknowledge that the timeline is subject to change and that no Party shall have any liability to the other Party for failure to meet any target date set forth above.
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SIGNATURE PAGE TO NON-BINDING TERM SHEET
IN WITNESS WHEREOF, each of the undersigned has caused this Non-Binding Term Sheet to be executed as of the date first written above, intending to be bound only by the provisions expressly designated herein as binding.
CALLOWAY-BRIGGS RENEWABLES INC.
By: ________
Name: Margaret "Meg" Calloway