TAX PROTECTION AGREEMENT
by and between
SOLSTICE PLATEAU ENERGY HOLDINGS LLC
a Delaware limited liability company
and
CALLOWAY-BRIGGS RENEWABLES INC.
a Texas corporation
Dated as of December 4, 2023
Reference: Limited Liability Company Agreement of Solstice Plateau Energy Holdings LLC, dated as of December 4, 2023, by and between Calloway-Briggs Renewables Inc. and Lumen Ridge Infrastructure Partners LLC
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TAX PROTECTION AGREEMENT
This TAX PROTECTION AGREEMENT (this "Agreement") is entered into as of December 4, 2023, by and between SOLSTICE PLATEAU ENERGY HOLDINGS LLC, a Delaware limited liability company (the "Company" or the "JV"), and CALLOWAY-BRIGGS RENEWABLES INC., a Texas corporation (the "Protected Member" or "CBR"). Each of the Company and CBR is sometimes referred to herein individually as a "Party" and collectively as the "Parties."
RECITALS
WHEREAS:
A. The Company is a Delaware limited liability company formed for the purpose of developing, constructing, financing, owning, and operating a portfolio of utility-scale solar energy projects. The Company's registered office is located c/o Peachtree Corporate Services, Inc., 1209 Orange Street, Suite 300, Wilmington, Delaware 19801. The Company's principal business office is located at 2300 Travis Street, Suite 4210, Houston, Texas 77006. The Company was organized and filed its Certificate of Formation with the Secretary of State of the State of Delaware under File Number 7849312 and has been assigned Employer Identification Number 93-4158203 by the Internal Revenue Service.
B. On the date hereof, CBR and Lumen Ridge Infrastructure Partners LLC, a Delaware limited liability company ("Lumen Ridge"), entered into that certain Limited Liability Company Agreement of Solstice Plateau Energy Holdings LLC, dated as of December 4, 2023 (as amended, restated, supplemented, or otherwise modified from time to time, the "LLC Agreement"), establishing a 50/50 joint venture, with aggregate initial equity commitments of Three Hundred Million Dollars ($300,000,000) (One Hundred Fifty Million Dollars ($150,000,000) from each member).
C. Pursuant to that certain Contribution Agreement dated as of December 4, 2023, by and between CBR and the Company (the "Contribution Agreement"), CBR is contributing to the Company a portfolio of eight (8) utility-scale solar development projects with an aggregate nameplate direct-current ("DC") capacity of approximately 1,200 megawatts ("MW") located in the States of Texas, New Mexico, and Arizona (collectively, the "Project Portfolio" or the "Contributed Assets"), consisting of the following projects:
(i) Red Mesa Solar I (approximately 200 MW DC, Pecos County, Texas);
(ii) Red Mesa Solar II (approximately 180 MW DC, Pecos County, Texas);
(iii) Cimarron Flats (approximately 150 MW DC, Crockett County, Texas);
(iv) Lone Star Prairie (approximately 130 MW DC, Webb County, Texas);
(v) Brazos Point (approximately 120 MW DC, Wharton County, Texas);
(vi) Sangre del Sol I (approximately 150 MW DC, Doña Ana County, New Mexico);
(vii) Sangre del Sol II (approximately 110 MW DC, Doña Ana County, New Mexico); and
(viii) Sonoran Ridge (approximately 160 MW DC, Pinal County, Arizona),
encompassing, in the aggregate, approximately 14,340 acres of leased and owned land, together with all associated development rights, permits, interconnection agreements, power purchase agreements, land leases, easements, and other tangible and intangible assets described in the Contribution Agreement.
D. The Parties have agreed that the Contributed Assets have a fair market value (and agreed book value for purposes of the LLC Agreement) of Ninety Million Dollars ($90,000,000), supported by the fairness analysis and independent valuation report of Ridgeline Barrow & Co. dated November 15, 2023 (which established a valuation range of Eighty-Seven Million Dollars ($87,000,000) to Ninety-Six Million Dollars ($96,000,000)). CBR's adjusted tax basis in the Contributed Assets is approximately Thirty-Four Million Two Hundred Thousand Dollars ($34,200,000). Accordingly, there exists a "Built-In Gain" (as defined herein) of approximately Fifty-Five Million Eight Hundred Thousand Dollars ($55,800,000), being the excess of the agreed fair market value of Ninety Million Dollars ($90,000,000) over the adjusted tax basis of Thirty-Four Million Two Hundred Thousand Dollars ($34,200,000).
E. The LLC Agreement provides that the Built-In Gain with respect to the Contributed Assets shall be allocated in accordance with Section 704(c) of the Internal Revenue Code of 1986, as amended (the "Code"), using the remedial allocation method described in Treasury Regulations Section 1.704-3(d), and that the Company shall maintain a capital account and tax allocation structure consistent therewith.
F. As a material inducement to CBR's willingness to contribute the Contributed Assets to the Company (rather than retaining such assets and separately monetizing them through one or more taxable sales or other transactions), CBR has required, and the Company has agreed to provide, the tax protections set forth in this Agreement for the Protection Period (as defined below) in order to protect CBR against the recognition of taxable income or gain attributable to the Built-In Gain that would result from certain dispositions or other taxable events with respect to the Contributed Assets. The Company acknowledges that CBR would not have been willing to contribute the Contributed Assets to the Company absent the tax protections provided under this Agreement.
G. The Company acknowledges that CBR's contribution of the Contributed Assets at the agreed book value of Ninety Million Dollars ($90,000,000) (representing part of CBR's total initial capital contribution of One Hundred Fifty Million Dollars ($150,000,000), the balance being Sixty Million Dollars ($60,000,000) in cash), and CBR's agreement to serve as development and construction manager for the JV projects pursuant to that certain Development and Construction Management Agreement dated as of December 4, 2023, by and between CBR and the Company (the "DCMA"), constitute good and valuable consideration for the Company's obligations under this Agreement.
NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
ARTICLE I — DEFINITIONS
Section 1.1 — Defined Terms. For purposes of this Agreement, the following terms shall have the meanings set forth below. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the LLC Agreement or the Contribution Agreement, as applicable.
"Adjusted Tax Basis" means CBR's carryover adjusted tax basis in the Contributed Assets as of the Closing Date, which is approximately Thirty-Four Million Two Hundred Thousand Dollars ($34,200,000), as adjusted from time to time for depreciation, amortization, cost recovery deductions, capital expenditures, and other tax adjustments required under the Code and Treasury Regulations. For the avoidance of doubt, the Adjusted Tax Basis of any individual Contributed Asset shall be its respective portion of the aggregate Adjusted Tax Basis as set forth on Schedule A hereto, as similarly adjusted from time to time.
"Agreed Value" means Ninety Million Dollars ($90,000,000), being the agreed fair market value and book value of the Contributed Assets as determined by the Parties and set forth in the Contribution Agreement and the LLC Agreement, based upon the independent valuation report of Ridgeline Barrow & Co. dated November 15, 2023.
"Built-In Gain" means the excess of the Agreed Value over the Adjusted Tax Basis of the Contributed Assets as of the Closing Date, equal to approximately Fifty-Five Million Eight Hundred Thousand Dollars ($55,800,000) (being $90,000,000 minus $34,200,000). The Built-In Gain allocable to each individual Contributed Asset is set forth on Schedule A hereto. The aggregate Built-In Gain shall be reduced from time to time as provided in Section 3.2(e) hereof.
"Business Day" means any day other than a Saturday, Sunday, or any other day on which commercial banks in Houston, Texas or Wilmington, Delaware are authorized or required by law or governmental decree to close.
"Closing Date" means the date on which the closing of the transactions contemplated by the LLC Agreement and the Contribution Agreement occurs, which is expected to occur on or about February 20, 2024.
"Code" means the Internal Revenue Code of 1986, as amended from time to time. Any reference to a provision of the Code shall include a reference to any successor provision thereto.
"Company" means Solstice Plateau Energy Holdings LLC, a Delaware limited liability company (EIN: 93-4158203), and its successors.
"Contributed Assets" means the Project Portfolio and all associated tangible and intangible assets contributed by CBR to the Company pursuant to the Contribution Agreement, including, without limitation, all land leases, surface use agreements, easements, rights-of-way, permits, governmental approvals, interconnection agreements, interconnection queue positions, power purchase agreements, development rights, engineering studies, environmental assessments, geotechnical reports, meteorological data, and other tangible and intangible property and rights associated with or appurtenant to each of the eight (8) solar energy projects comprising the Project Portfolio, all as more fully described in the Contribution Agreement.
"Contribution Agreement" means that certain Contribution Agreement dated as of December 4, 2023, by and between CBR and the Company, as the same may be amended, restated, supplemented, or otherwise modified from time to time in accordance with its terms.
"Covered Gain" means the amount of taxable income or gain that would be recognized by CBR under Section 704(c) of the Code (including any "reverse Section 704(c)" gain arising under Treasury Regulations Section 1.704-3(a)(6) or otherwise) attributable to the Built-In Gain as a result of a Taxable Disposition or other Triggering Event with respect to any Contributed Asset during the Protection Period. For the avoidance of doubt, Covered Gain shall not include gain attributable to appreciation in the value of the Contributed Assets occurring after the Closing Date (i.e., gain in excess of the Built-In Gain).
"DCMA" means that certain Development and Construction Management Agreement dated as of December 4, 2023, by and between CBR and the Company.
"Guaranteed Debt" means any indebtedness of the Company or any of its subsidiaries for which CBR (or any of its affiliates) bears an economic risk of loss within the meaning of Treasury Regulations Section 1.752-2, including any guarantee, indemnification, letter of credit, or other arrangement that would cause CBR to bear the economic risk of loss with respect to such indebtedness.
"LLC Agreement" means the Limited Liability Company Agreement of Solstice Plateau Energy Holdings LLC, dated as of December 4, 2023, by and among CBR and Lumen Ridge, as the same may be amended, restated, supplemented, or otherwise modified from time to time in accordance with its terms.
"Lumen Ridge" means Lumen Ridge Infrastructure Partners LLC, a Delaware limited liability company (EIN: 83-1924076), the other member of the Company.
"Make-Whole Payment" means the payment required to be made by the Company to CBR pursuant to Article III hereof in the event of a Triggering Event occurring during the Protection Period.
"Management Committee" means the Management Committee of the Company established pursuant to the LLC Agreement, consisting of six (6) members, three (3) appointed by CBR and three (3) appointed by Lumen Ridge.
"Pennington Clarke" means Pennington Clarke LLP, a nationally recognized independent accounting firm, or such successor or replacement firm as may be mutually agreed by the Parties.
"Permitted Disposition" means a disposition of a Contributed Asset that does not give rise to a Make-Whole Payment obligation, as described in Section 2.3 hereof.
"Person" means any individual, corporation, partnership, limited liability company, joint venture, trust, estate, governmental authority, or other entity.
"Protected Member" means Calloway-Briggs Renewables Inc. (EIN: 46-2837451), a Texas corporation, and its permitted successors and assigns who have assumed CBR's rights under this Agreement in accordance with Section 8.6 hereof.
"Protection Period" means the period commencing on the Closing Date and ending at 11:59 p.m. (Central Time) on the seventh (7th) anniversary of the Closing Date. Assuming a Closing Date of February 20, 2024, the Protection Period shall expire on February 20, 2031.
"Section 704(c) Gain" means gain required to be allocated to CBR under Section 704(c) of the Code and the Treasury Regulations promulgated thereunder (using the remedial allocation method as described in Treasury Regulations Section 1.704-3(d)) in respect of the Built-In Gain on the Contributed Assets.
"SOFR" means the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York (or its successor) on the applicable date; provided that, if SOFR is discontinued or is no longer available, "SOFR" shall mean such replacement benchmark rate as is identified by the Federal Reserve Board and the Federal Reserve Bank of New York (or any successor thereto) as the recommended replacement for SOFR.
"Tax Rate" means the highest combined marginal federal and applicable state income tax rate applicable to a corporation organized under the laws of the State of Texas for the taxable year in which the Covered Gain would be recognized, including any applicable surcharges, surtaxes, or additional taxes enacted under federal or state law. The applicable state rate shall be computed based on the weighted-average state income tax rates of the jurisdictions in which the Contributed Assets are located (currently Texas, New Mexico, and Arizona), taking into account any applicable apportionment factors. For the avoidance of doubt, to the extent that the State of Texas does not impose a traditional corporate income tax but imposes a franchise tax or margin tax applicable to CBR, the state tax rate component shall include the effective rate of such tax as applied to the Covered Gain.
"Taxable Disposition" means any direct or indirect sale, exchange, transfer, or other disposition of any Contributed Asset (or any portion thereof, or any interest therein) in a transaction that would cause CBR to recognize taxable income or gain attributable to the Built-In Gain, including, without limitation, a foreclosure sale, a deed in lieu of foreclosure, an involuntary conversion (to the extent not qualifying for nonrecognition treatment), a taxable merger, a taxable conversion, or any other transaction that results in the recognition of Section 704(c) Gain with respect to the Contributed Assets.
"Treasury Regulations" means the temporary and final regulations promulgated under the Code by the U.S. Department of the Treasury, as such regulations may be amended from time to time. Any reference to a specific provision of the Treasury Regulations shall include a reference to any successor provision thereto.
"Triggering Event" means any of the events described in Section 2.2 hereof.
Section 1.2 — Other Defined Terms. In addition to the terms defined in Section 1.1, certain other terms are defined elsewhere in this Agreement and shall have the meanings ascribed to them therein. To the extent that any capitalized term used in this Agreement is not defined herein, such term shall have the meaning ascribed to it in the LLC Agreement or the Contribution Agreement, as applicable. In the event of any conflict between the definitions in this Agreement and the definitions in the LLC Agreement or the Contribution Agreement, the definitions in this Agreement shall control for purposes of this Agreement.
Section 1.3 — Rules of Construction. Unless the context otherwise requires: (a) words in the singular include the plural and vice versa; (b) references to "Articles," "Sections," and "Schedules" refer to Articles, Sections, and Schedules of this Agreement; (c) the words "include," "includes," and "including" are deemed to be followed by the phrase "without limitation"; (d) references to any Person include such Person's successors and permitted assigns; (e) references to any agreement, document, or instrument include all amendments, supplements, and modifications thereto; (f) the headings and captions used in this Agreement are for convenience of reference only and shall not affect the meaning or interpretation of any provision hereof; and (g) references to "dollars" or "$" mean United States dollars.
ARTICLE II — TAX PROTECTION COVENANTS
Section 2.1 — General Tax Protection Covenant.
(a) During the Protection Period (from the Closing Date through and including February 20, 2031, assuming a Closing Date of February 20, 2024), the Company shall not, and shall cause its subsidiaries and affiliates not to, directly or indirectly cause or permit a Taxable Disposition of any Contributed Asset (or any interest therein), unless such disposition constitutes a Permitted Disposition as described in Section 2.3 hereof or the Company complies with the Make-Whole Payment obligation set forth in Article III hereof.
(b) The aggregate Built-In Gain protected under this Agreement is Fifty-Five Million Eight Hundred Thousand Dollars ($55,800,000), allocated among the individual Contributed Assets as set forth on Schedule A hereto, as reduced from time to time in accordance with Section 3.2(e) hereof.
(c) The Company agrees to use commercially reasonable efforts to structure its operations, financing, refinancing, asset management, disposition, and development activities to avoid triggering the recognition by CBR of Section 704(c) Gain during the Protection Period. Without limiting the generality of the foregoing, the Company shall consider and, where commercially practicable, implement structures, including like-kind exchanges under Section 1031 of the Code, installment sales under Section 453 of the Code, and other tax-deferred transaction structures, to the extent such structures would avoid or defer the recognition of Section 704(c) Gain by CBR.
(d) Nothing in this Section 2.1 shall be construed to prohibit the Company from engaging in a Taxable Disposition of a Contributed Asset during the Protection Period, provided that the Company complies with the Make-Whole Payment obligation set forth in Article III hereof with respect to any such disposition that is not a Permitted Disposition.
Section 2.2 — Triggering Events.
A "Triggering Event" shall mean any of the following events occurring during the Protection Period:
(a) Taxable Sale or Exchange. Any taxable sale, exchange, or disposition (including, without limitation, a foreclosure sale, a deed in lieu of foreclosure, an abandonment, or an involuntary conversion not qualifying for nonrecognition treatment) of all or any portion of the Contributed Assets, whether effected directly by the Company or indirectly through any subsidiary, joint venture, partnership, or other entity holding title to any Contributed Asset.
(b) Taxable Distribution. Any distribution by the Company to a member of all or any portion of the Contributed Assets in a transaction that causes recognition of gain under Section 731(b) of the Code or otherwise results in the recognition of Section 704(c) Gain by CBR.
(c) Taxable Restructuring. A taxable merger, conversion, consolidation, reorganization, or other restructuring of the Company or any entity holding the Contributed Assets (including a conversion of the Company from a partnership to a corporation for federal income tax purposes) that results in the recognition of Built-In Gain allocable to CBR.
(d) Liability Reduction. A reduction in CBR's share of Company liabilities allocable to the Contributed Assets (within the meaning of Section 752 of the Code and the Treasury Regulations promulgated thereunder) that would be treated as a deemed distribution under Section 752(b) of the Code in excess of CBR's adjusted basis in its interest in the Company, to the extent such reduction is attributable to affirmative action taken by the Company, the Management Committee, or any subsidiary of the Company (and not the result of unilateral action by a lender, governmental authority, or other third party not within the reasonable control of the Company). For the avoidance of doubt, a reduction in CBR's share of liabilities resulting solely from the passage of time or scheduled amortization under existing credit facilities shall not constitute a Triggering Event unless the Company had the ability, through commercially reasonable efforts, to maintain or replace such liabilities and failed to do so.
(e) Other Recognition Events. Any other event or transaction caused or initiated by the Company or any Company subsidiary that results in CBR recognizing taxable income or gain attributable to the Built-In Gain on the Contributed Assets, including, without limitation, a deemed sale of assets resulting from an election under Section 754 of the Code that adversely affects CBR's tax position with respect to the Built-In Gain, or a contribution of Contributed Assets to a taxable entity.
For purposes of this Section 2.2, the term "indirectly" shall include any transaction or series of related transactions that, taken together, have the effect of causing CBR to recognize Section 704(c) Gain with respect to the Built-In Gain on any Contributed Asset, regardless of the form in which such transaction or transactions are structured.
Section 2.3 — Permitted Dispositions (Exceptions).
Notwithstanding Sections 2.1 and 2.2, the Make-Whole Payment obligation set forth in Article III shall not apply to any of the following events or dispositions (each, a "Permitted Disposition"):
(a) Post-Protection Period Dispositions. Any disposition that occurs after the expiration of the Protection Period (i.e., after 11:59 p.m. (Central Time) on February 20, 2031, assuming a Closing Date of February 20, 2024).
(b) Like-Kind Exchanges. Any disposition of a Contributed Asset pursuant to a like-kind exchange under Section 1031 of the Code (or any successor provision), to the extent that CBR does not recognize gain as a result of such exchange. If CBR recognizes partial gain in connection with such exchange (for example, by reason of the receipt of boot), the Make-Whole Payment obligation shall apply only to the portion of Covered Gain actually recognized by CBR.
(c) Governmental Taking or Condemnation. Any disposition compelled by a final, non-appealable governmental taking, condemnation, or exercise of the power of eminent domain by a governmental authority, provided that the Company uses commercially reasonable efforts to structure such disposition as a tax-deferred transaction (for example, under Section 1033 of the Code) and cooperates with CBR in connection therewith. In the event that the Company fails to use such commercially reasonable efforts and CBR recognizes Covered Gain as a result, the Company's Make-Whole Payment obligation shall apply.
(d) CBR Consent. Any disposition where CBR has provided prior written consent specifically waiving its right to a Make-Whole Payment with respect to such disposition. Any such consent shall be effective only to the extent expressly set forth therein and shall not constitute a waiver of CBR's rights with respect to any other disposition or Triggering Event.
(e) Casualty or Force Majeure. Any disposition occurring as a result of a casualty event or force majeure event (as such terms are defined in the LLC Agreement), provided that the Company uses commercially reasonable efforts to reinvest insurance or other proceeds in replacement property in a manner qualifying for nonrecognition treatment under Section 1033 of the Code within the time period specified therein. If such reinvestment is not accomplished and CBR recognizes Covered Gain as a result, the Company's Make-Whole Payment obligation shall apply to the extent of such Covered Gain.
(f) Depreciation and Amortization. Normal depreciation, amortization, or cost recovery deductions claimed by the Company with respect to the Contributed Assets, which reduce the Built-In Gain over time through the remedial allocation method under Section 704(c) of the Code and Treasury Regulations Section 1.704-3(d), but do not give rise to a Make-Whole Payment obligation.
Section 2.4 — Debt Maintenance Covenant.
(a) The Company shall use commercially reasonable efforts throughout the Protection Period to maintain CBR's allocable share of Company "nonrecourse liabilities" (within the meaning of Treasury Regulations Section 1.752-3) and "partner nonrecourse liabilities" (within the meaning of Treasury Regulations Section 1.752-2), in the aggregate, at a level sufficient to ensure that CBR does not recognize gain under Sections 731 and 752 of the Code as a result of a deemed distribution arising from a reduction in CBR's share of such liabilities.
(b) Without limiting the generality of the foregoing, the Company acknowledges that the project-level credit facility of up to Four Hundred Eighty Million Dollars ($480,000,000) provided by Trident National Bank, N.A. (Reference Number TNB-EIF-2024-0193) (the "Credit Facility"), together with any future indebtedness incurred by the Company or its subsidiaries in connection with the development, construction, and financing of the Project Portfolio, constitutes a significant source of allocable nonrecourse liabilities for purposes of Section 752 of the Code. The Company shall take into account the impact on CBR's share of such liabilities in connection with any drawdown, repayment, refinancing, restructuring, or termination of the Credit Facility or any other Company indebtedness during the Protection Period.
(c) The Company shall provide CBR with reasonable prior written notice, not less than thirty (30) days in advance, before undertaking or consummating any refinancing, prepayment, repayment, restructuring, termination, or material amendment of any Company indebtedness that would have the effect of materially reducing CBR's share of nonrecourse liabilities. For purposes of this Section 2.4(c), a reduction shall be deemed "material" if it would reduce CBR's allocable share of nonrecourse liabilities by more than Five Million Dollars ($5,000,000) in the aggregate.
(d) Upon receipt of such notice, CBR shall have the right to consult with the Company and its tax advisors regarding alternative structures or replacement financing arrangements that would preserve CBR's share of nonrecourse liabilities. The Company shall consider in good faith any reasonable proposals made by CBR in this regard.
Section 2.5 — Cooperation and Information.
(a) The Company shall furnish to CBR, on a timely basis, all information reasonably necessary for CBR to determine its tax liability with respect to the Contributed Assets and the Built-In Gain, including, without limitation, information concerning any proposed or pending disposition of Contributed Assets, any changes in the Company's liability structure, and any other event or circumstance that could affect the remaining Built-In Gain.
(b) The Company shall notify CBR in writing not less than sixty (60) days prior to entering into any binding agreement or commitment with respect to any proposed transaction that could reasonably be expected to constitute a Triggering Event. Such notice shall include a reasonably detailed description of the proposed transaction, the expected amount of Covered Gain that would be recognized by CBR as a result thereof, and the Company's proposed approach to structuring the transaction.
(c) Following delivery of such notice, the Company shall consult with CBR (and CBR's independent tax advisors, including Calderwood & Harkness LLP) in good faith regarding possible alternative structures, modifications, or mitigation measures that could avoid or reduce the recognition of Section 704(c) Gain by CBR while still accomplishing the Company's business objectives. The Company shall not unreasonably refuse to implement any such alternative structure proposed by CBR that is commercially feasible and does not impose a material incremental cost on the Company or Lumen Ridge.
(d) The Company shall provide CBR with an annual summary, to be delivered no later than sixty (60) days following the end of each taxable year of the Company during the Protection Period, setting forth: (i) the remaining aggregate Built-In Gain as of the end of such taxable year (after giving effect to depreciation, amortization, and any Triggering Events occurring during such year); (ii) CBR's allocable share of Company nonrecourse liabilities as of the end of such taxable year; and (iii) a summary of any events occurring during such taxable year that could affect CBR's tax position with respect to the Built-In Gain.
ARTICLE III — MAKE-WHOLE PAYMENT
Section 3.1 — Obligation to Make Payment.
(a) If a Triggering Event occurs during the Protection Period, the Company shall pay to CBR a Make-Whole Payment calculated in accordance with Section 3.2 hereof. The Make-Whole Payment is intended to compensate CBR for the federal, state, and local income tax liability arising from CBR's recognition of Covered Gain as a result of the Triggering Event, on an after-tax basis.
(b) The Make-Whole Payment shall be due and payable within thirty (30) days following the close of the Company's taxable year in which the Triggering Event occurs (or, if later, within thirty (30) days following the date on which the amount of the Make-Whole Payment is finally determined pursuant to Section 3.3 hereof).
(c) The Make-Whole Payment shall be made by wire transfer of immediately available funds to an account designated by CBR in writing to the Company.
Section 3.2 — Calculation of Make-Whole Payment.
The Make-Whole Payment shall be calculated as follows:
(a) Covered Gain. The first step in computing the Make-Whole Payment is to determine the amount of Covered Gain recognized by CBR as a result of the Triggering Event. The Covered Gain shall be equal to the amount of Section 704(c) Gain (up to the remaining Built-In Gain at the time of the Triggering Event) that is allocated to CBR under the Code and Treasury Regulations as a result of the Triggering Event. For the avoidance of doubt, Covered Gain shall not include any gain attributable to post-contribution appreciation in the value of the Contributed Assets (i.e., gain in excess of the Built-In Gain existing as of the Closing Date, as reduced pursuant to Section 3.2(e) below).
(b) Tax Liability. The assumed tax liability (the "Assumed Tax Liability") shall be computed by multiplying the Covered Gain by the Tax Rate (the highest combined marginal federal and applicable state corporate income tax rate for the relevant taxable year of CBR in which the Covered Gain would be recognized). For purposes of the illustrative calculation set forth on Schedule B, the Parties have assumed a combined Tax Rate of twenty-five percent (25%), consisting of a federal corporate income tax rate of twenty-one percent (21%) plus an estimated state and local effective rate of approximately four percent (4%). The actual Tax Rate shall be determined as of the date of the Triggering Event based on then-applicable law.
(c) Gross-Up. The Make-Whole Payment shall be "grossed up" so that, after taking into account any federal, state, and local income taxes payable by CBR on the receipt of the Make-Whole Payment itself (assuming for this purpose that CBR is taxable at the Tax Rate on the Make-Whole Payment), CBR retains an amount sufficient to pay the Assumed Tax Liability on the Covered Gain. The gross-up formula is as follows:
Make-Whole Payment = Assumed Tax Liability ÷ (1 − Tax Rate)
For example, if the Assumed Tax Liability is $13,950,000 and the Tax Rate is 25%, the Make-Whole Payment would be $13,950,000 ÷ (1 − 0.25) = $18,600,000.
(d) Partial Dispositions. If only a portion of the Contributed Assets is the subject of a Triggering Event, the Covered Gain shall be determined with respect only to the Built-In Gain attributable to the specific Contributed Asset(s) disposed of (or otherwise the subject of the Triggering Event), based on the allocation of Built-In Gain among the Contributed Assets as set forth on Schedule A hereto (as adjusted from time to time in accordance with this Agreement).
(e) Reduction for Prior Gain Recognition and Depreciation. The remaining Built-In Gain subject to protection under this Agreement shall be reduced by: (i) any Covered Gain previously recognized by CBR for which a Make-Whole Payment has been made (or for which CBR has waived the Make-Whole Payment pursuant to a Permitted Disposition under Section 2.3(d)); and (ii) the cumulative effect of depreciation, amortization, and cost recovery deductions that have reduced the Built-In Gain through the remedial allocation method under Section 704(c) of the Code and Treasury Regulations Section 1.704-3(d). The Company shall provide CBR with an annual calculation of the remaining Built-In Gain as part of the annual summary required by Section 2.5(d) hereof.
Section 3.3 — Dispute Resolution Regarding Computation.
(a) The Company shall prepare and deliver to CBR a detailed written computation of the Make-Whole Payment (a "Payment Computation") within sixty (60) days following the close of the Company's taxable year in which the Triggering Event occurs. The Payment Computation shall include the Company's determination of the Covered Gain, the applicable Tax Rate, the Assumed Tax Liability, and the grossed-up Make-Whole Payment amount, together with reasonable supporting documentation and calculations.
(b) CBR shall have thirty (30) days following receipt of the Payment Computation to review the same and to deliver to the Company a written notice of objection (an "Objection Notice") setting forth in reasonable detail the items or amounts with which CBR disagrees and the basis for such disagreement. If CBR does not deliver an Objection Notice within such thirty (30)-day period, the Payment Computation shall be deemed accepted by CBR and shall be final and binding.
(c) If CBR timely delivers an Objection Notice, the Parties shall attempt in good faith to resolve the disputed items within thirty (30) days following the Company's receipt of the Objection Notice. If the Parties are unable to resolve all disputed items within such period, the unresolved items shall be submitted to Pennington Clarke LLP (or, if Pennington Clarke LLP is unable or unwilling to serve, such other nationally recognized independent accounting firm as the Parties mutually agree upon in good faith) (the "Independent Accountant") for final determination.
(d) The Independent Accountant shall act as an expert, not an arbitrator, and shall determine only those items specifically in dispute. The determination of the Independent Accountant shall be final and binding on the Parties, absent manifest error. The costs, fees, and expenses of the Independent Accountant shall be shared equally by the Company and CBR.
Section 3.4 — Source of Make-Whole Payment.
(a) The Make-Whole Payment shall be an obligation of the Company and shall be paid from the Company's available cash, cash equivalents, or other liquid assets. The Make-Whole Payment shall be a Company obligation that is senior to distributions to the members under the distribution waterfall provisions of the LLC Agreement.
(b) The Make-Whole Payment shall not constitute a "distribution" to CBR for purposes of the distribution waterfall or capital account provisions of the LLC Agreement but shall instead be treated as an expense or guaranteed payment of the Company within the meaning of Section 707(c) of the Code, unless the Parties mutually agree to a different characterization.
(c) If the Company has insufficient funds to satisfy the Make-Whole Payment obligation when due, the Management Committee shall promptly take such action as may be necessary to fund the obligation, including: (i) causing a capital call to be issued to the members in accordance with the capital call provisions of the LLC Agreement (subject to the supermajority approval requirements thereof, requiring the affirmative vote of not less than five (5) of six (6) Management Committee members); or (ii) arranging for a short-term loan or credit facility to fund the obligation. Lumen Ridge has acknowledged and agreed, solely for purposes of this Section 3.4 and Section 8.7, that it will not unreasonably withhold its consent to or vote against a capital call or other funding mechanism reasonably necessary to fund a Make-Whole Payment obligation that has been properly computed in accordance with Section 3.2 hereof.
Section 3.5 — Interest on Late Payments.
Any Make-Whole Payment (or any portion thereof) not made within the thirty (30)-day payment period specified in Section 3.1(b) shall accrue interest at the rate of SOFR plus three hundred (300) basis points per annum, compounded monthly, from the date such payment was due until the date such payment is made in full. Such interest shall be in addition to, and not in lieu of, any other rights or remedies available to CBR under this Agreement, the LLC Agreement, or applicable law.
ARTICLE IV — TERM AND EXPIRATION
Section 4.1 — Protection Period.
(a) The tax protections set forth in this Agreement shall commence on the Closing Date and shall expire at 11:59 p.m. (Central Time) on the seventh (7th) anniversary of the Closing Date. Assuming a Closing Date of February 20, 2024, the Protection Period shall expire on February 20, 2031.
(b) Upon the expiration of the Protection Period, the Company shall have no further obligation under Articles II or III of this Agreement with respect to any Triggering Event occurring after such date. For the avoidance of doubt, any disposition of a Contributed Asset that is consummated after the expiration of the Protection Period shall not give rise to a Make-Whole Payment obligation, regardless of whether such disposition was contemplated, negotiated, or approved prior to the expiration of the Protection Period. The determination of whether a Triggering Event occurred during or after the Protection Period shall be based on the date on which the closing of the relevant transaction occurs (or, in the case of a deemed disposition under Section 752 of the Code, the date on which the relevant liability reduction takes effect).
Section 4.2 — Survival of Make-Whole Obligation.
(a) The Company's obligation to make a Make-Whole Payment with respect to any Triggering Event that occurs during the Protection Period shall survive the expiration of the Protection Period and shall remain in full force and effect until the Make-Whole Payment has been paid in full, together with any interest accrued thereon pursuant to Section 3.5.
(b) The Company's obligations under Article V (Representations and Warranties) and Article VI (Indemnification) shall survive for a period of three (3) years following the expiration of the Protection Period (i.e., through February 20, 2034, assuming a Closing Date of February 20, 2024). No claim for indemnification under Article VI may be asserted after the expiration of such three (3)-year survival period, except for claims asserted in writing prior to such expiration, which claims shall survive until finally resolved.
(c) The obligations set forth in Sections 2.5 (Cooperation and Information), 3.3 (Dispute Resolution Regarding Computation), and Article VIII (Miscellaneous) shall survive the expiration or termination of this Agreement to the extent necessary to give full effect to the rights and obligations of the Parties hereunder.
Section 4.3 — No Early Termination.
(a) This Agreement may not be terminated prior to the expiration of the Protection Period without the prior written consent of CBR.
(b) This Agreement may not be amended, supplemented, or otherwise modified without the prior written consent of both the Company and CBR. Any purported amendment, supplement, or modification that does not comply with this Section 4.3(b) shall be null and void and of no force or effect.
(c) This Agreement shall not be affected by, and shall survive, any amendment to, restatement of, or termination of the LLC Agreement, the Contribution Agreement, the DCMA, or any other ancillary agreement, unless CBR has expressly consented in writing to the termination of its rights hereunder in connection with such amendment, restatement, or termination.
(d) For the avoidance of doubt, the dissolution, winding up, or termination of the Company shall not extinguish the Company's obligations under this Agreement to the extent that a Triggering Event occurred prior to such dissolution, winding up, or termination and the corresponding Make-Whole Payment remains unpaid.
ARTICLE V — REPRESENTATIONS AND WARRANTIES
Section 5.1 — Representations and Warranties of the Company.
The Company hereby represents and warrants to CBR as of the date hereof and as of the Closing Date as follows:
(a) Organization and Good Standing. The Company is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of Delaware. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties requires such qualification, including the States of Texas, New Mexico, and Arizona.
(b) Power and Authority. The Company has full power and authority to execute, deliver, and perform its obligations under this Agreement, including the obligation to make Make-Whole Payments as and when required hereunder.
(c) Due Authorization; Binding Obligation. The execution, delivery, and performance of this Agreement have been duly authorized by all necessary action on the part of the Company, including the unanimous approval of the Management Committee (such approval having been obtained at a meeting of the Management Committee held on November 28, 2023, as reflected in the minutes thereof). This Agreement constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law).
(d) No Conflict. The execution, delivery, and performance of this Agreement by the Company does not and will not (i) violate or conflict with the Company's Certificate of Formation or LLC Agreement, (ii) violate or conflict with any material agreement, instrument, order, judgment, decree, statute, rule, or regulation applicable to or binding upon the Company, or (iii) result in the creation or imposition of any lien, encumbrance, or security interest upon any of the assets of the Company (other than as contemplated by the Credit Facility).
(e) No Consents Required. No consent, approval, authorization, or order of, or filing or registration with, any governmental authority or any other Person is required in connection with the execution, delivery, and performance of this Agreement by the Company, other than such consents, approvals, authorizations, orders, filings, or registrations as have been obtained or made prior to the date hereof.
Section 5.2 — Representations and Warranties of CBR.
CBR hereby represents and warrants to the Company as of the date hereof and as of the Closing Date as follows:
(a) Organization and Good Standing. CBR is a corporation duly organized, validly existing, and in good standing under the laws of the State of Texas (Texas Secretary of State File Number 0801647392). CBR is duly qualified to transact business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties requires such qualification.
(b) Power and Authority. CBR has full corporate power and authority to execute, deliver, and perform its obligations under this Agreement.
(c) Due Authorization; Binding Obligation. The execution, delivery, and performance of this Agreement have been duly authorized by all necessary corporate action on the part of CBR, including the approval of CBR's board of directors (such approval having been obtained by unanimous written consent of the board of directors dated November 22, 2023). This Agreement constitutes a valid and binding obligation of CBR, enforceable against CBR in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity.
(d) Tax Basis. As of the Closing Date, the adjusted tax basis of CBR in the Contributed Assets is approximately Thirty-Four Million Two Hundred Thousand Dollars ($34,200,000), allocated among the individual Contributed Assets substantially as set forth on Schedule A hereto. CBR is not aware of any pending or threatened adjustment, assessment, or challenge by any taxing authority that would materially affect CBR's adjusted tax basis in the Contributed Assets.
(e) Tax Status. CBR is, and during the Protection Period will remain, a corporation taxable under Subchapter C of the Code. CBR has not elected, and will not elect during the Protection Period, to change its status as a corporation taxable under Subchapter C (including, without limitation, CBR shall not elect to be treated as an S corporation under Section 1362 of the Code).
(f) Third-Party Consents. CBR has obtained all necessary consents required in connection with the execution, delivery, and performance of this Agreement, including the consent of Cascadia Growth Equity Fund III, L.P. (a holder of CBR's equity securities), as required under CBR's existing Stockholders' Agreement dated as of March 15, 2019 (such consent having been obtained in writing on November 20, 2023 and delivered to the Company).
ARTICLE VI — INDEMNIFICATION
Section 6.1 — Indemnification by the Company.
The Company shall indemnify, defend, and hold harmless CBR and its affiliates and each of their respective officers, directors, employees, partners, members, managers, agents, and representatives (each, an "Indemnified Person") from and against any and all losses, liabilities, damages, penalties, costs, and expenses (including reasonable attorneys' fees, accountants' fees, expert witness fees, and other costs of investigation or defense) (collectively, "Losses") arising out of or resulting from:
(a) any breach by the Company of its obligations, covenants, or agreements set forth in this Agreement, including, without limitation, the Company's failure to make a Make-Whole Payment when due or the Company's failure to comply with the covenants set forth in Sections 2.1, 2.4, and 2.5 hereof;
(b) any breach of any representation or warranty made by the Company in Section 5.1 hereof; and
(c) any action or omission by the Company or any of its subsidiaries that results in CBR recognizing Covered Gain during the Protection Period for which the Company fails to make the required Make-Whole Payment.
Section 6.2 — Limitations on Indemnification.
(a) Aggregate Cap. The Company's aggregate liability under this Article VI shall not exceed the grossed-up Make-Whole Payment amount that would be payable with respect to the full remaining Built-In Gain at the time of the breach (calculated in accordance with Section 3.2 hereof as if the entire remaining Built-In Gain were recognized by CBR as Covered Gain in a single Triggering Event at the Tax Rate then in effect). For the avoidance of doubt, this limitation does not limit the Company's obligation to make Make-Whole Payments under Article III.
(b) Time Limitation. All indemnification claims under this Article VI must be asserted by written notice delivered to the Company within the applicable survival period set forth in Section 4.2 hereof (i.e., no later than February 20, 2034, assuming a Closing Date of February 20, 2024).
(c) Mitigation. Each Indemnified Person shall use commercially reasonable efforts to mitigate any Losses for which indemnification may be sought under this Article VI, including by pursuing available insurance recoveries and other third-party sources of reimbursement. The Company's indemnification obligation shall be reduced by the amount of any insurance proceeds or other third-party recoveries actually received by the Indemnified Person with respect to the applicable Losses.
(d) No Consequential Damages. In no event shall the Company be liable under this Article VI for any punitive, consequential, special, or indirect damages, except to the extent such damages are awarded to a third party in a third-party claim.
ARTICLE VII — PARTNERSHIP REPRESENTATIVE AND TAX MATTERS
Section 7.1 — Partnership Representative.
(a) CBR, acting through Priya Narayanan, Chief Financial Officer of CBR, serves as the "partnership representative" (within the meaning of Section 6223 of the Code, as amended by the Bipartisan Budget Act of 2015) (the "Partnership Representative") of the Company, as designated pursuant to the LLC Agreement.
(b) Any audit adjustments, IRS examination proceedings, administrative appeals, or judicial proceedings (collectively, "Tax Proceedings") that could affect the Built-In Gain, the allocation of Section 704(c) Gain, or the tax protections provided under this Agreement shall be conducted by the Partnership Representative in consultation with CBR's independent tax counsel and advisors. The Partnership Representative shall not settle, compromise, or otherwise resolve any Tax Proceeding that could materially and adversely affect the Built-In Gain or the Make-Whole Payment calculation without CBR's prior written consent (which consent shall not be unreasonably withheld, conditioned, or delayed).
(c) The Partnership Representative shall promptly notify CBR of the commencement of any Tax Proceeding relating to the Contributed Assets or the Built-In Gain, and shall keep CBR reasonably informed of the status of any such proceeding.
Section 7.2 — Section 704(c) Method Confirmation.
(a) The Parties hereby confirm that the remedial allocation method described in Treasury Regulations Section 1.704-3(d) applies to all allocations of income, gain, loss, and deduction with respect to the Contributed Assets for purposes of Section 704(c) of the Code. The application of the remedial allocation method shall be consistent with the terms of Section 4.3 of the LLC Agreement and the schedules thereto.
(b) The Company shall not change, modify, or replace the Section 704(c) method applicable to the Contributed Assets (including by adopting the traditional method, the traditional method with curative allocations, or any other reasonable method) without the prior written consent of CBR. Any attempted change in the Section 704(c) method without such consent shall be null and void.
(c) The Company shall cause all capital accounts and tax allocations to be maintained in a manner consistent with the requirements of Treasury Regulations Section 1.704-1(b)(2)(iv) and the remedial allocation method, and shall not make any election or take any position on any tax return that is inconsistent with the foregoing.
Section 7.3 — Investment Tax Credits and Depreciation.
(a) The Parties acknowledge that the JV projects comprising the Project Portfolio are expected to be eligible for accelerated depreciation under the Modified Accelerated Cost Recovery System ("MACRS") using a five (5)-year recovery period, bonus depreciation under Section 168(k) of the Code (to the extent available for the taxable year in which the projects are placed in service), and Investment Tax Credits ("ITCs") under Section 48 of the Code at a base rate of thirty percent (30%), or forty percent (40%) if the applicable domestic-content bonus credit requirements under Section 45(b)(9) of the Code (as cross-referenced in Section 48) are satisfied.
(b) ITCs shall be allocated fifty percent (50%) to CBR and fifty percent (50%) to Lumen Ridge, consistent with their respective membership interests in the Company and the allocation provisions of the LLC Agreement. The availability, allocation, or utilization of ITCs shall not affect the calculation of the Built-In Gain, the Covered Gain, or the Make-Whole Payment under this Agreement, as the ITCs relate to post-contribution expenditures and not to the Built-In Gain existing as of the Closing Date.
(c) Depreciation and amortization deductions with respect to the Contributed Assets shall be allocated in accordance with Section 704(c) of the Code using the remedial allocation method. To the extent that such deductions reduce the Built-In Gain over time, the remaining Built-In Gain shall be correspondingly reduced as provided in Section 3.2(e) hereof.
Section 7.4 — Tax Returns and Reporting.
(a) The Company's independent auditor and tax-return preparer, Pennington Clarke LLP (Harold Yeung, CPA, Engagement Partner), shall prepare all federal, state, and local income tax returns and information returns of the Company, including all Schedules K-1 to be furnished to the members, in a manner consistent with the terms of this Agreement, the LLC Agreement, and applicable law.
(b) The Company shall provide draft Schedules K-1 (IRS Form 1065, Schedule K-1) to CBR for review and comment not less than sixty (60) days prior to the filing due date (including extensions) of the Company's federal income tax return (IRS Form 1065) for each taxable year of the Company during the Protection Period. CBR shall have the right to review and comment on such draft Schedules K-1, and the Company shall consider in good faith any comments or objections raised by CBR with respect to the allocation of items of income, gain, loss, deduction, or credit attributable to the Contributed Assets or the Built-In Gain.
(c) The Company shall not file any amended tax return or take any position on any tax return that is inconsistent with the terms of this Agreement without CBR's prior written consent.
ARTICLE VIII — MISCELLANEOUS
Section 8.1 — Governing Law.
This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of law principles thereof that would result in the application of the laws of any other jurisdiction. Each Party hereby irrevocably submits to the jurisdiction of the courts of the State of Delaware and the federal courts of the United States located in the District of Delaware for the purpose of any suit, action, or proceeding arising out of or relating to this Agreement (other than disputes subject to arbitration pursuant to Section 8.2 hereof).
Section 8.2 — Dispute Resolution.
(a) Any dispute, controversy, or claim arising out of or relating to this Agreement, or the breach, termination, or validity thereof (other than disputes regarding the computation of the Make-Whole Payment, which shall be resolved in accordance with Section 3.3 hereof), shall be resolved in accordance with the deadlock and dispute resolution procedures set forth in Article XII of the LLC Agreement, as follows:
(i) Negotiation. The Parties shall first attempt to resolve the dispute through good-faith negotiations between their respective senior executives for a period of sixty (60) days following written notice of the dispute by either Party to the other.
(ii) Mediation. If the dispute is not resolved through negotiation within such sixty (60)-day period, the Parties shall submit the dispute to non-binding mediation before a mutually agreed mediator for a period of thirty (30) days, to be conducted in Houston, Texas.
(iii) Arbitration. If the dispute is not resolved through mediation within such thirty (30)-day period, the dispute shall be finally resolved by binding arbitration administered by the International Chamber of Commerce ("ICC") under the ICC Rules of Arbitration in effect at the time of the arbitration. The arbitration shall be conducted by a panel of three (3) arbitrators, with one (1) arbitrator appointed by each Party and the third arbitrator selected by the two (2) Party-appointed arbitrators. The seat of arbitration shall be Houston, Texas, and the language of the arbitration shall be English.
(b) Notwithstanding the foregoing, disputes regarding the computation of the Make-Whole Payment shall be resolved exclusively in accordance with Section 3.3 hereof.
(c) Nothing in this Section 8.2 shall preclude either Party from seeking temporary or preliminary injunctive relief from a court of competent jurisdiction to prevent irreparable harm pending the resolution of a dispute through the procedures set forth above.
Section 8.3 — Notices.
All notices, requests, demands, consents, and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given when (a) delivered personally, (b) sent by registered or certified mail, return receipt requested, postage prepaid, (c) sent by nationally recognized overnight courier service, or (d) sent by email (with confirmation of receipt), addressed as follows:
If to the Company:
Solstice Plateau Energy Holdings LLC 2300 Travis Street, Suite 4210 Houston, Texas 77006
Attention: Daniel Estrada, Chief Executive Officer
Email: destrada@solsticeplateau.com
with a copy to:
Solstice Plateau Energy Holdings LLC 2300 Travis Street, Suite 4210 Houston, Texas 77006
Attention: Victor Osei, Chief Financial Officer
Email: vosei@solsticeplateau.com
If to CBR:
Calloway-Briggs Renewables Inc. 2300 Travis Street, Suite 4200 Houston, Texas 77006
Attention: Rebecca Whitfield, General Counsel