PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
Dear Renata,
I am writing to promptly advise you and the Ironside team of a notification we received earlier today from Meridian Infrastructure Partners LP, transmitted through its counsel at Breckenridge Sloane & Pratt LLP. Specifically, Charles A. Delacroix of BSP forwarded to our office a communication originating from David R. Hargreaves, Managing Partner of Meridian, concerning a material development affecting Cascadia Renewables Holdings, Inc. and the pending acquisition. A copy of Mr. Delacroix's correspondence is attached for your reference.
**Summary of the Notification**
On October 28, 2022, the Portland Metropolitan Water District formally notified Cascadia Renewables Holdings, Inc. that it intends to renegotiate the terms of the 40-year water-treatment concession for the Bull Run Filtration Project. The concession was originally executed in approximately 2018. The Water District's stated basis for the renegotiation is changed regulatory requirements under Oregon SB 1567 (2022), a recently enacted Oregon statute. The Water District has indicated that renegotiation discussions are expected to open later this month; no resolution timeline has been indicated.
Meridian provided this notification to Ironside pursuant to the information-sharing and reporting obligations set forth in the Side Letter dated July 29, 2022 and the LP Agreement of ICM Cascadia Co-Invest, LP.
**Significance of the Bull Run Concession**
As you are aware from our diligence work, the Bull Run Filtration Project concession is one of Cascadia's three water-treatment concessions and represents the largest single municipal contract in Cascadia's portfolio. Annual revenue attributable to the Bull Run concession is approximately $64 million. For context, Cascadia's total FY 2021 revenue was $487 million and FY 2021 EBITDA was $138 million (per the audited financials prepared by Halstead & Greer LLP), making the Bull Run concession approximately 13% of total revenue.
The concession was identified as a key value driver in our due diligence. I refer you to our Material Contracts Summary memorandum dated August 22, 2022 and the Summary Due Diligence Report and Risk Matrix dated September 1, 2022 for additional background. The weighted-average remaining life of Cascadia's long-term contracts is approximately 22 years; any material change to the Bull Run terms could meaningfully affect that profile and, correspondingly, the valuation underpinning this investment.
**Potential Implications — Flagged for Further Analysis**
We have identified the following areas of concern that warrant careful analysis as additional information becomes available:
1. *EPA / Material Adverse Effect Analysis.* The renegotiation may be relevant to the Material Adverse Effect definition under the Equity Purchase Agreement dated September 15, 2022. We will be preparing a detailed analysis of whether this development constitutes or could constitute an MAE, including a thorough review of applicable carve-outs (e.g., changes in law, general regulatory actions affecting the industry) and quantitative materiality thresholds. Pamela Cross will oversee this analysis directly.
2. *Transaction Timeline.* The current EPA outside date is December 31, 2022. If the concession renegotiation is not resolved promptly — and there is no indication from the Water District that it will be — it could affect the ability to satisfy closing conditions. The parties may need to consider whether an extension of the outside date is warranted and, if so, on what terms.
3. *Enterprise Value / Economics.* The agreed enterprise value of $1,950,000,000 (implied EV/EBITDA of approximately 14.1x) was predicated on Cascadia's existing contract portfolio, including the Bull Run concession at its current terms. Any material degradation in the concession economics — whether through reduced rate structures, shortened concession periods, or increased capital expenditure obligations imposed by the new regulatory framework — could affect the fundamental investment thesis.
4. *Financing.* The debt commitment letter executed August 30, 2022 by Atlas National Bank, N.A. and Pinnacle Credit Partners LLC ($975 million senior secured term loan plus $150 million revolving credit facility) contains conditions precedent and material adverse change provisions that could be implicated by this development. We will review the relevant provisions and assess the risk.
5. *Representations and Warranties Insurance.* The R&W policy issued by Northgate Specialty Insurance Co. (Policy No. NSW-RI-2022-09814, $195 million coverage limit, bound September 1, 2022) will need to be assessed with respect to coverage scope and any exclusions related to known pending disputes or pre-closing developments disclosed after binding. We intend to review the policy terms carefully in light of this notification.
6. *Co-Invest Vehicle.* ICM Cascadia Co-Invest, LP currently has $22.5 million of called capital deployed (from the single capital call dated August 15, 2022) and $277.5 million in unfunded commitments. Ironside's rights and remedies under the LP Agreement — including, notably, the Material Impediment Event provisions set forth in Section 7.04 — may become relevant depending on how the situation develops. We will address this in a separate memorandum.
**Regulatory Context**
For completeness, I note that the following regulatory approvals remain pending:
- FERC Section 203 application (Docket No. EC22-143-000), filed October 19, 2022 — pending. - OPUC application (Docket No. UM-2287), filed October 14, 2022 — pending. - CFIUS voluntary notice was acknowledged September 20, 2022, with no further action required.
The concession renegotiation adds a meaningful layer of uncertainty to the regulatory and transactional timeline that is already subject to the constraints of the December 31 outside date.
**Next Steps and Recommendations**
We intend to take the following steps immediately and recommend the following actions:
First, we will prepare a detailed memorandum analyzing the impact of the concession renegotiation on the MAE definition under the EPA. We expect to have this to you within the next several business days.
Second, we will prepare a separate memorandum addressing Ironside's rights and remedies under the LP Agreement in the event that this development leads to a failed closing or a Material Impediment Event declaration under Section 7.04.
Third, we recommend that Ironside request additional detail from Meridian — either through Lillian Fong and Graham Whitfield at Meridian, or directly from David Hargreaves — regarding the following: (a) the specific terms of the Bull Run concession that the Water District is seeking to renegotiate; (b) Cascadia management's assessment of the situation, including the views of Jonathan M. Weir and Sandra K. Llewellyn; and (c) whether Meridian's financial advisor, Blackthorn Advisory Group LLC, has updated its analysis of Cascadia's valuation or contract risk profile in light of this development.
Fourth, we recommend scheduling a call with Ironside's infrastructure team and Calderwood & Harkness to discuss strategy and positioning. We are happy to coordinate with your office on timing.
**Closing**
We will continue to monitor developments closely and will provide updates as additional information becomes available. Please do not hesitate to reach out if you would like to discuss by phone — I am available at your convenience, as is Pamela.
For background reference, the following prior C&H work product may be useful to have at hand:
- Due Diligence Memorandum: Cascadia Material Contracts Summary (August 22, 2022) - Summary Due Diligence Report and Risk Matrix (September 1, 2022) - EPA Closing Conditions Checklist (September 15, 2022)
Please let us know how you would like to proceed.
Best regards,
Theresa Kim Lead Associate, Funds & Asset Management Calderwood & Harkness LLP 125 Broad Street, 44th Floor New York, NY 10004 T: (212) 555-4738 E: tkim@calderwoodharkness.com
Attachment: BSP Notification Letter — C.A. Delacroix to C&H (November 10, 2022)
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