PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 125 Broad Street, 44th Floor New York, NY 10004
DUE DILIGENCE MEMORANDUM
Matter Number: 1023-00001
Date: August 8, 2022
To: Marcus J. Calloway, Founder & Chief Investment Officer, Ironside Capital Management LP Renata Obasi, Senior Managing Director, Infrastructure, Ironside Capital Management LP
From: Owen Fischer, Working Associate, Funds & Asset Management, Calderwood & Harkness LLP
Reviewed by: Theresa Kim, Lead Associate, Funds & Asset Management, Calderwood & Harkness LLP Pamela Cross, Responsible Partner, Funds & Asset Management, Calderwood & Harkness LLP
Re: Due Diligence Review — Corporate Structure and Subsidiaries of Cascadia Renewables Holdings, Inc.
Purpose. This memorandum summarizes the findings of Calderwood & Harkness LLP ("C&H") from its review of the corporate structure, organizational documents, and subsidiary framework of Cascadia Renewables Holdings, Inc. ("Cascadia" or "CRH") in connection with Ironside Capital Management LP's ("Ironside") proposed approximately $300 million co-investment through ICM Cascadia Co-Invest, LP (the "Co-Investment Vehicle") alongside Meridian Infrastructure Partners Fund IV, LP ("Fund IV") in the acquisition of 100% of the issued and outstanding equity interests of Cascadia (the "Transaction"). This memorandum is intended solely for the internal use of Ironside and its authorized representatives, and is protected by the attorney-client privilege and the work-product doctrine.
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I. Executive Summary
Cascadia Renewables Holdings, Inc. is a corporation organized and existing under the laws of the State of Oregon, with its principal executive offices located at 1100 SW Sixth Avenue, Suite 1800, Portland, Oregon 97204. Cascadia is led by Jonathan M. Weir, who serves as President and Chief Executive Officer, and Sandra K. Llewellyn, who serves as Chief Financial Officer and Treasurer. The company operates a diversified renewable-energy and water-infrastructure platform across the states of Oregon, Washington, and Idaho.
Cascadia's platform comprises fourteen (14) hydroelectric generating facilities, six (6) wind farms, and three (3) water-treatment concessions. For the fiscal year ended December 31, 2021, Cascadia reported consolidated revenue of approximately $487 million and consolidated EBITDA of approximately $138 million, in each case as reflected in the audited consolidated financial statements prepared by Halstead & Greer LLP, Cascadia's independent auditor. These figures have not been independently verified by C&H but are consistent with the financial information presented to Ironside by Meridian Infrastructure Partners LLC, the general partner of Fund IV, in its investment memorandum dated May 12, 2022.
The agreed enterprise value for the Transaction is $1.95 billion, implying an EV/EBITDA multiple of approximately 14.1x based on FY 2021 EBITDA. Net debt at the Cascadia level is approximately $900 million as of the most recent balance sheet date made available (March 31, 2022), yielding an implied equity value of approximately $1.05 billion. The equity consideration will be funded by Fund IV (contributing approximately $750 million, representing a 71.43% interest in Cascadia Acquisition Corp.) and by the Co-Investment Vehicle (contributing approximately $300 million, representing a 28.57% interest in Cascadia Acquisition Corp.), together with a management rollover of existing equity valued at approximately 10% of total post-closing equity.
The current ownership of Cascadia is as follows:
The Transaction will be effected through Cascadia Acquisition Corp., a newly formed corporation organized under the laws of the State of Delaware, which will be wholly owned by Fund IV and the Co-Investment Vehicle in the percentages set forth above. At closing, Cascadia Acquisition Corp. will acquire 100% of the equity of Cascadia from the Selling Shareholders (as defined in the draft Equity Purchase Agreement dated July 15, 2022 (the "EPA")), and Cascadia will become a wholly owned subsidiary of Cascadia Acquisition Corp.
This memorandum is based on C&H's review of organizational documents, Secretary of State filings, certificates of good standing, corporate minute books, and other materials provided through the virtual data room (the "VDR") maintained by Ridgeway, Ashford & Malone PC ("RAM"), counsel to Cascadia and the Selling Shareholders. The VDR was hosted on the Thackeray Solutions platform and was first made available to C&H on June 27, 2022. Document production is ongoing, and certain items remain outstanding as of the date hereof, as described in Annex E.
Overall Assessment. Based on our review to date, we conclude that Cascadia's corporate structure is moderately complex but typical for a multi-state renewable-energy and water-infrastructure platform of this scale. The organizational documents for Cascadia and its subsidiaries are generally well-maintained, reflecting the involvement of experienced legal counsel and the institutional sponsorship of Timberline Growth Equity Fund III, LP since the 2016–2017 timeframe. We have identified certain areas requiring further diligence or resolution prior to closing, which are summarized in Section XIII below and which we have categorized by risk level. None of the items identified to date are, in our assessment, likely to preclude the consummation of the Transaction, but several require careful attention in the EPA negotiation and in the pre-closing regulatory approval process.
II. Scope and Methodology
A. Documents Reviewed
In connection with this memorandum, C&H has reviewed the following categories of documents, as made available through the VDR or obtained through supplemental requests to Cascadia management and RAM:
• Articles of Incorporation (and all amendments thereto) of Cascadia Renewables Holdings, Inc.
• Amended and Restated Bylaws of Cascadia Renewables Holdings, Inc., as currently in effect
• Certificates of Formation and/or Articles of Organization for all identified subsidiaries of Cascadia
• Operating Agreements and/or LLC Agreements for all identified limited liability company subsidiaries
• Corporate minute books for Cascadia Renewables Holdings, Inc., including minutes of meetings of the Board of Directors and stockholders, and records of actions taken by written consent, from January 1, 2017 through June 30, 2022
• Annual reports and periodic filings made with the offices of the Secretary of State in Oregon, Washington, Idaho, and Delaware for Cascadia and each of its subsidiaries
• Certificates of good standing (or equivalent certificates of status) obtained or requested from the offices of the Secretary of State in Oregon, Washington, Idaho, and Delaware for Cascadia and each of its subsidiaries, in each case dated no earlier than July 15, 2022
• Foreign qualification filings and certificates of authority in each jurisdiction in which Cascadia and its subsidiaries are qualified to transact business as foreign entities
• Stockholder Agreement dated as of September 14, 2017, among Cascadia Renewables Holdings, Inc., Timberline Growth Equity Fund III, LP, Weir Family Trust, and the Management Rollover Pool participants (as amended through the date hereof)
• Cascadia Renewables Holdings, Inc. 2017 Management Equity Incentive Plan and all award agreements thereunder
• Intercompany agreements, including management services agreements, cash management agreements, and intercompany loan agreements
• Select corporate minute books and resolutions for certain significant subsidiaries, as made available in the VDR
B. Data Room References
Documents are referenced throughout this memorandum by VDR folder and item number. The VDR is organized according to the index prepared by RAM and furnished to C&H on June 27, 2022 (the "VDR Index"). The primary folders relevant to this memorandum are:
• Folder 1.0 — Corporate Organization and Good Standing
• Folder 1.1 — Organizational Documents — Parent
• Folder 1.2 — Organizational Documents — Subsidiaries
• Folder 1.3 — Stockholder and Equity Agreements
• Folder 1.4 — Corporate Minutes and Resolutions
• Folder 1.5 — Annual Reports and State Filings
• Folder 1.6 — Certificates of Good Standing
• Folder 1.7 — Intercompany Agreements
Specific VDR item numbers are referenced in Annex C and in the body of this memorandum where applicable.
C. Supplemental Materials
In addition to materials available through the VDR, C&H obtained supplemental information from the following sources:
• Halstead & Greer LLP ("H&G"), Cascadia's independent auditor and tax advisor, with offices at 200 Market Street, Suite 1500, Portland, Oregon 97201. H&G provided copies of federal and state tax returns for Cascadia and certain subsidiaries for fiscal years 2019 through 2021, organizational entity charts prepared for tax-filing purposes, and Employer Identification Number (EIN) confirmations for all entities in the Cascadia corporate family.
• Cascadia management, through responses to C&H's supplemental due diligence questionnaire dated July 8, 2022 and follow-up questions submitted via email on July 22, 2022 and August 1, 2022.
• Oregon Secretary of State, Business Registry Division, through direct online searches and certified document requests.
• Washington Secretary of State, Corporations and Charities Division, through direct online searches and certified document requests.
• Idaho Secretary of State, Business Entity Division, through direct online searches.
• Delaware Division of Corporations, through direct online searches and certified document requests.
D. Organizational Chart Verification
C&H received a consolidated organizational chart of Cascadia and all of its subsidiaries from Cascadia management, dated as of June 15, 2022 (VDR Item 1.0-001). We independently verified this organizational chart against Secretary of State filings, formation documents, and operating agreements in Oregon, Washington, Idaho, and Delaware. Our verification confirmed the accuracy of the organizational chart in all material respects, subject to certain notational discrepancies regarding formation dates for two Idaho subsidiaries that have been reported to RAM for clarification (see Annex E, Item 3).
E. Cross-Reference to Related Workstreams
This memorandum addresses only the corporate structure and subsidiary framework of Cascadia. C&H is conducting parallel due diligence workstreams on the following topics, each of which is the subject of a separate memorandum or is in preparation:
• Material Contracts — C&H Due Diligence Memorandum: Cascadia Material Contracts Summary (expected date: August 22, 2022)
• Regulatory Permits and Licenses — C&H Due Diligence Memorandum: Cascadia Regulatory Permits and Licenses (expected date: August 18, 2022)
• Real Property and Easements — C&H Due Diligence Memorandum: Cascadia Real Property and Easement Review (expected date: September 2, 2022)
• Environmental — C&H Due Diligence Memorandum: Cascadia Environmental Compliance Review (in preparation; expected date: September 12, 2022)
• Employment and Benefits — C&H Due Diligence Memorandum: Cascadia Employment and Employee Benefits Review (expected date: August 25, 2022)
• Litigation — C&H Due Diligence Memorandum: Cascadia Litigation and Contingent Liabilities (expected date: August 15, 2022)
• intellectual Property — C&H Due Diligence Memorandum: Cascadia intellectual Property Review (expected date: August 29, 2022)
• Tax Structuring — C&H Memorandum: Tax Structuring Analysis for Co-Investment Vehicle (dated July 20, 2022, prepared by Sylvia Hartwell, Tax Partner)
• Debt Financing — C&H Memorandum: Review of Debt Commitment Letter (expected date: August 30, 2022)
• Indemnification and Risk Allocation — C&H Memorandum: Indemnification Cap, Basket, and Survival Analysis (expected date: September 5, 2022)
• R&W Insurance — C&H Memorandum: R&W Insurance Policy Review and Coverage Analysis (expected date: August 31, 2022)
Where appropriate, cross-references to these workstreams are provided in the body of this memorandum.
III. Parent Entity — Cascadia Renewables Holdings, Inc.
A. Formation and Good Standing
Cascadia Renewables Holdings, Inc. was incorporated in the State of Oregon on March 22, 2004, pursuant to Articles of Incorporation filed with the Oregon Secretary of State, Business Registry Division. The company was originally formed under the name "Pacific Cascade Hydro, Inc." and changed its name to "Cascadia Renewables Holdings, Inc." effective June 8, 2015, in connection with a broader corporate reorganization and the expansion of its business beyond hydroelectric operations. The Articles of Incorporation were most recently amended and restated on September 14, 2017, in connection with Timberline Growth Equity Fund III, LP's acquisition of its 62% equity stake.
Cascadia's Oregon Secretary of State registry number is 539274-83. The company is currently in good standing with the Oregon Secretary of State, as confirmed by a Certificate of Good Standing dated July 28, 2022 (VDR Item 1.6-001). Annual reports have been timely filed through the most recent filing year, and all associated fees and taxes have been paid.
Cascadia's registered agent in Oregon is Ashgrove Services Inc., located at 388 Ashbury Asset Advisors, Suite 420, Salem, Oregon 97301. Ashgrove Services Inc. has served as Cascadia's registered agent continuously since at least 2015, based on the records available for our review.
The original formation of the entity pre-dates the current ownership period. Timberline Growth Equity Fund III, LP acquired its controlling 62% stake in a series of transactions completed between September 2016 and February 2017, as reflected in the corporate minutes and the Stockholder Agreement dated September 14, 2017 (VDR Item 1.3-001). Prior to the Timberline acquisition, the company was controlled by its founder, Jonathan M. Weir, and certain angel and early-stage investors who exited in connection with the Timberline transaction.
B. Capitalization
1. Authorized Capital
Pursuant to the Amended and Restated Articles of Incorporation dated September 14, 2017 (VDR Item 1.1-002), Cascadia is authorized to issue the following classes of capital stock:
• Common Stock: 100,000,000 shares of Common Stock, par value $0.001 per share (the "Common Stock").
• Preferred Stock: 10,000,000 shares of Preferred Stock, par value $0.001 per share (the "Preferred Stock"), which may be issued in one or more series, with the rights, preferences, privileges, and restrictions thereof to be determined by the Board of Directors.
As of the date of the most recent capitalization table provided by Cascadia management (dated June 30, 2022) (VDR Item 1.3-005), the issued and outstanding shares are as follows:
No shares of Preferred Stock are currently issued or outstanding. The Board of Directors has not authorized any series of Preferred Stock for issuance. The "blank check" preferred authority in the Articles of Incorporation is a standard provision that provides the Board with flexibility to issue preferred stock in the future without stockholder approval, subject to applicable law and the terms of the Stockholder Agreement.
2. Outstanding Equity Awards and Other Instruments
The Cascadia Renewables Holdings, Inc. 2017 Management Equity Incentive Plan (the "Plan") (VDR Item 1.3-006) authorizes the issuance of stock options, restricted stock, restricted stock units, stock appreciation rights, and phantom equity awards covering up to 5,000,000 shares of Common Stock. As of June 30, 2022, according to the Plan administrator's records (VDR Item 1.3-007), the following awards are outstanding under the Plan:
• Stock Options: 2,150,000 shares subject to outstanding options, with a weighted-average exercise price of $3.42 per share and a weighted-average remaining term of approximately 4.2 years. Options are exercisable in equal annual installments over four years from the date of grant, subject to continued employment.
• Restricted Stock Units: 875,000 RSUs outstanding, vesting in equal annual installments over three years from the date of grant.
• Phantom Equity Units: 425,000 phantom equity units outstanding, providing cash-settled payments based on the appreciation in value of a notional share of Common Stock above a specified base value.
No warrants or convertible instruments are outstanding. The Plan and all award agreements thereunder contain change-of-control provisions. Upon a "Change of Control" (as defined in the Plan), all unvested options and RSUs will accelerate and vest in full, and phantom equity units will become fully vested and payable. The treatment of Plan awards in connection with the Transaction will be addressed in the EPA and related side agreements. We understand from discussions with RAM that the current expectation is that all outstanding Plan awards will be cancelled at closing in exchange for cash consideration based on the per-share equity value implied by the Transaction, net of applicable exercise prices for stock options. This treatment is subject to negotiation.
3. Management Rollover
As noted above, the Management Rollover Pool currently holds 20% of the outstanding Common Stock. Pursuant to the Stockholder Agreement and as described in the term sheet for the Transaction dated June 1, 2022 (VDR Item 2.0-003), approximately 50% of the Management Rollover Pool's equity (representing approximately 10% of total post-closing equity) is expected to be rolled over into the acquisition structure. The mechanics of the rollover — whether effected as a contribution of existing shares in exchange for equity in Cascadia Acquisition Corp. or as a cash-out and reinvestment — will be determined in the EPA and the management rollover agreements. The tax implications of the rollover structure are addressed in the C&H Memorandum: Tax Structuring Analysis for Co-Investment Vehicle (dated July 20, 2022, prepared by Sylvia Hartwell).
4. Stockholder Agreement
The Amended and Restated Stockholder Agreement dated as of September 14, 2017 (the "Stockholder Agreement") (VDR Item 1.3-001), as amended by Amendment No. 1 dated March 15, 2019 (VDR Item 1.3-002) and Amendment No. 2 dated November 8, 2020 (VDR Item 1.3-003), governs the relationship among Cascadia and its stockholders. The key provisions of the Stockholder Agreement are summarized below:
• Drag-Along Rights. Timberline Growth Equity Fund III, LP, as the holder of a majority of the outstanding Common Stock, has the right to "drag along" all other stockholders in a sale of 100% of the equity of Cascadia, provided that the drag-along transaction values each share of Common Stock at not less than a specified floor price (currently $7.50 per share, as adjusted by Amendment No. 2). The drag-along right is exercisable upon the affirmative vote or written consent of holders of not less than 66-2/3% of the outstanding Common Stock. Based on our review, Timberline's 62% stake, combined with the expected support of the Weir Family Trust's 18% stake, would be sufficient to satisfy this threshold.
• Tag-Along Rights. Each stockholder other than Timberline has the right to participate on a pro rata basis in any sale by Timberline of all or a portion of its shares to a third party (other than a permitted transfer to an affiliate).
• Right of First Refusal (ROFR). Any stockholder proposing to transfer shares (other than permitted transfers) must first offer such shares to the company and then to the other stockholders on the same terms and conditions as the proposed transfer. The ROFR provisions are subject to customary exceptions for permitted transfers to affiliates, family trusts, and estate planning vehicles.
• Transfer Restrictions. All transfers of shares are subject to the prior written consent of the Board of Directors, which consent may not be unreasonably withheld. In addition, no transfer may be made if it would result in Cascadia being required to register any class of its equity securities under Section 12 of the Securities Exchange Act of 1934.
• Board Composition. The Board of Directors is composed of seven (7) members. Timberline has the right to designate four (4) directors, the Weir Family Trust has the right to designate two (2) directors, and the remaining one (1) director is designated by the mutual agreement of Timberline and the Weir Family Trust as an independent director. The current board composition is consistent with these provisions, as discussed in Section III.C below.
5. Anti-Dilution Protections and Preemptive Rights
The Stockholder Agreement contains customary preemptive rights provisions. In the event that Cascadia proposes to issue any new equity securities (subject to certain exceptions, including issuances under the Plan and issuances in connection with strategic acquisitions), each stockholder has the right to purchase its pro rata share of such new securities on the same terms and conditions as the proposed issuance. No anti-dilution protections of the type commonly found in venture capital financing documents (e.g., weighted-average or full-ratchet anti-dilution) are present, which is consistent with the nature of the investment as a growth-equity and control transaction rather than a venture capital financing.
C. Governance
1. Board of Directors
The Board of Directors of Cascadia Renewables Holdings, Inc. currently consists of seven (7) members, as follows:
The Board meets quarterly in regular session and holds additional special meetings as needed. The Board has established three standing committees: the Audit Committee (chaired by Gregory T. Nash), the Compensation Committee (chaired by Margaret S. Aldrich), and the Investment Committee (chaired by Hugh Callister). Committee charters are on file in the corporate minute books (VDR Items 1.4-012 through 1.4-014).
2. Officers. The current officer roster of Cascadia Renewables Holdings, Inc. is as follows:
• President and Chief Executive Officer: Jonathan M. Weir
• Chief Financial Officer and Treasurer: Sandra K. Llewellyn
• Executive Vice President, Hydroelectric Operations: Thomas R. Engstrom
• Executive Vice President, Wind Operations: Anika Johansson
• Vice President, Water Infrastructure: Michael F. Correia
• Vice President and General Counsel: Cynthia L. Vasquez
• Vice President, Human Resources: Denise M. Okoro
• Secretary: Cynthia L. Vasquez
3. Bylaws. The Amended and Restated Bylaws of Cascadia Renewables Holdings, Inc. (VDR Item 1.1-003) were adopted effective September 14, 2017, and have not been further amended. Key provisions include:
• Quorum. A majority of the total number of directors then in office constitutes a quorum for the transaction of business at any meeting of the Board of Directors. A majority of shares entitled to vote, represented in person or by proxy, constitutes a quorum at any meeting of stockholders.
• Voting Thresholds. The affirmative vote of a majority of directors present at a meeting at which a quorum is present is the act of the Board, except as otherwise required by the Articles of Incorporation, the Stockholder Agreement, or applicable law. Certain reserved matters (including mergers, sales of all or substantially all assets, amendments to the Articles or Bylaws, and incurrence of indebtedness exceeding $25 million) require the affirmative vote of at least five (5) of the seven (7) directors (i.e., a supermajority), effectively providing Timberline with a veto right over such matters.
• Board Committee Structure. The Board may designate one or more committees, each consisting of one or more directors, by resolution adopted by a majority of the full Board. Committees may exercise such authority of the Board as is delegated to them, subject to applicable law.
• Indemnification and Advancement. The Bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Oregon law (ORS 60.387 et seq.), including advancement of expenses upon receipt of an undertaking. The indemnification provisions are supplemented by directors' and officers' liability insurance maintained by Cascadia (current carrier: Severin Indemnity Co.; policy limits: $25 million per occurrence / $50 million aggregate; policy period: January 1, 2022 – December 31, 2022).
4. Minute Book Review
C&H has reviewed the corporate minute books of Cascadia Renewables Holdings, Inc. for the period from January 1, 2017 through June 30, 2022 (VDR Items 1.4-001 through 1.4-045). The minute books reflect regular quarterly meetings of the Board of Directors, annual meetings of stockholders, and periodic actions by written consent. The minutes are generally well-organized and appear to have been maintained by experienced corporate counsel. We note the following observations:
• Minutes for fiscal years 2017 through 2021 are complete and reflect all material corporate actions, including the approval of annual operating budgets, the authorization of significant capital expenditures, the approval of the 2017 Management Equity Incentive Plan, and the authorization of intercompany transactions.
• Minutes for the first and second quarters of 2022 are available and reflect the Board's initial consideration and authorization of the Transaction process, including the engagement of Ridgeway, Ashford & Malone PC as transaction counsel and the appointment of a special committee (consisting of Gregory T. Nash and Patricia A. Haverford) to evaluate the fairness of the Transaction to non-Timberline stockholders.
• We did not identify any material corporate actions that were taken without proper authorization or documentation, nor did we identify any gaps in the minute book that would suggest undocumented Board or stockholder actions.
D. Foreign Qualifications
Cascadia Renewables Holdings, Inc., as an Oregon corporation, is qualified to do business as a foreign corporation in the following jurisdictions:
Certificates of good standing (or certificates of status, as applicable) have been obtained for Cascadia in all jurisdictions in which it is formed or qualified, and all are dated within thirty (30) days of the date of this memorandum. We note that the Delaware qualification appears to have been obtained in connection with the Timberline transaction in 2017 and is maintained for purposes of certain intercompany agreements and the registration of intermediate holding company subsidiaries organized under Delaware law. Cascadia does not appear to have material direct operations in Delaware.
Registered agents in each jurisdiction are as follows:
IV. Subsidiary Structure — Overview
A. Organizational Chart
Cascadia Renewables Holdings, Inc. sits at the top of the corporate family. Below it are a number of intermediate holding company subsidiaries and direct operating subsidiaries, organized primarily by business segment. The full organizational chart is set forth in Annex A to this memorandum.
Based on our review of the organizational chart provided by Cascadia management (VDR Item 1.0-001), as verified against Secretary of State filings and formation documents, the Cascadia corporate family consists of the following structure:
Tier 1 — Parent: Cascadia Renewables Holdings, Inc. (Oregon corporation)
Tier 2 — Segment-Level Intermediate Holding Companies:
1. Cascadia Hydro Holdings, LLC (Delaware LLC) — holds all hydroelectric segment subsidiaries
2. Cascadia Wind Holdings, LLC (Delaware LLC) — holds all wind segment subsidiaries
3. Cascadia Water Infrastructure Holdings, LLC (Oregon LLC) — holds all water infrastructure segment subsidiaries
4. Cascadia Shared Services, LLC (Oregon LLC) — corporate shared services entity
Tier 3 — Regional / Sub-Segment Intermediate Holding Companies and Direct Operating Subsidiaries:
Beneath each segment-level holding company are regional or sub-segment holding companies and, in most cases, individual project-company subsidiaries that hold and operate specific generating facilities, wind farms, or water-treatment concessions. The total number of direct and indirect subsidiaries of Cascadia, including intermediate holding companies and operating entities, is thirty-seven (37), as set forth in the entity summary table at Annex B.
All subsidiaries are wholly owned (100%), directly or indirectly, by Cascadia Renewables Holdings, Inc., unless otherwise noted in this memorandum. We did not identify any minority-owned subsidiaries, joint ventures, or unconsolidated equity interests, with the possible exception of certain tax-equity structures at the wind-farm project-company level, which are discussed in Section VI.C below.
B. Entity Types
The subsidiaries of Cascadia employ a mix of limited liability companies and, to a lesser extent, corporations. The entity types are summarized below:
• Oregon LLCs: Used for Oregon-based operating subsidiaries and for the water infrastructure segment holding company. Oregon LLCs benefit from single-member LLC treatment for federal and state income tax purposes (i.e., they are disregarded entities for tax purposes when owned by a single member), simplifying tax compliance and avoiding entity-level taxation.
• Washington LLCs: Used for Washington-based operating subsidiaries, including hydroelectric and wind project companies located in Washington state.
• Idaho LLCs: Used for Idaho-based operating subsidiaries, including hydroelectric and wind project companies located in Idaho.
• Delaware LLCs: Used for certain intermediate holding companies at the segment level (Cascadia Hydro Holdings, LLC and Cascadia Wind Holdings, LLC). Delaware LLCs are commonly used for holding company structures due to the flexibility and well-developed body of law governing LLCs under the Delaware Limited Liability Company Act (6 Del. C. § 18-101 et seq.), as well as the absence of Delaware state income tax on entities that do not conduct business within the state.
• Oregon Corporation: Cascadia Shared Services, LLC was initially organized as an Oregon corporation but was converted to an Oregon LLC effective January 1, 2020, based on the records reviewed.
The rationale for entity selection reflects a combination of tax considerations (principally the use of single-member LLCs to achieve disregarded-entity treatment), regulatory requirements (certain FERC and state regulatory filings are entity-specific), liability isolation (the project-company structure limits cross-default and contagion risk among projects), and historical structuring decisions made by Timberline and prior management. The entity selection is consistent with market practice for infrastructure platforms of this type and scale.
V. Hydroelectric Segment Subsidiaries
A. Overview
Cascadia's hydroelectric segment comprises fourteen (14) hydroelectric generating facilities located across Oregon, Washington, and Idaho. These facilities collectively represent the largest revenue-producing segment of Cascadia's business and account for approximately 55% of consolidated revenue on a trailing twelve-month basis as of March 31, 2022.
The hydroelectric segment is organized under the intermediate holding company Cascadia Hydro Holdings, LLC, a Delaware limited liability company formed on September 14, 2017 (VDR Item 1.2-001). Cascadia Hydro Holdings, LLC is wholly owned by Cascadia Renewables Holdings, Inc. and serves as the direct or indirect parent of all hydroelectric project-company subsidiaries.
Consistent with standard practice in the infrastructure sector, each hydroelectric facility is typically held by a separate single-purpose limited liability company (a "project company"). The project-company structure serves several important functions: (i) it isolates the assets, liabilities, and cash flows of each facility from those of other facilities and from the parent; (ii) it facilitates project-level financing, as lenders typically require that borrowing entities be single-purpose, bankruptcy-remote vehicles with no business or assets other than the subject project; (iii) it simplifies regulatory compliance, as FERC hydroelectric licenses and related permits are held at the individual project-company level; and (iv) it provides operational flexibility, as individual projects can be refinanced, recapitalized, or divested without affecting the broader corporate structure.
FERC Hydroelectric Licenses. Each of Cascadia's hydroelectric facilities operates under a license issued by the Federal Energy Regulatory Commission ("FERC") pursuant to Part I of the Federal Power Act (16 U.S.C. §§ 791a–823d). These licenses are held at the project-company level and are not transferable without FERC approval under Section 203 of the Federal Power Act (16 U.S.C. § 824b). A detailed review of the FERC licenses, including their terms, conditions, and expiration dates, is the subject of the C&H Due Diligence Memorandum: Cascadia Regulatory Permits and Licenses (expected date: August 18, 2022). As noted in Section XIII below, a FERC Section 203 application was filed on October 19, 2022 (Docket No. EC22-143-000) for the transfer of FERC-jurisdictional licenses in connection with the Transaction. FERC approval is a condition to closing under the draft EPA.
B. Key Operating Entities
The following table sets forth the principal hydroelectric project-company subsidiaries of Cascadia, as identified in our review:
Each of the entities listed above is a single-purpose limited liability company, directly or indirectly wholly owned by Cascadia Hydro Holdings, LLC. In certain cases, an additional regional intermediate holding LLC is interposed between Cascadia Hydro Holdings, LLC and the individual project companies (e.g., Cascadia Oregon Hydro Holdings, LLC, a Delaware LLC, holds the Oregon-based hydroelectric project companies). These intermediate entities are described in Section VIII below.
C. Organizational Document Review
C&H has reviewed the operating agreements or LLC agreements for each of the fourteen hydroelectric project-company subsidiaries identified above, as well as the operating agreement of Cascadia Hydro Holdings, LLC and any regional intermediate holding company LLCs. Our findings are summarized as follows:
Single-Member Structure. Each project company is structured as a single-member LLC, with its immediate parent entity serving as the sole member. This structure provides for disregarded-entity treatment for federal and state income tax purposes, which is consistent with the overall tax planning of the Cascadia platform.
Manager-Managed Governance. Each project company is manager-managed, with the sole member (or, in some cases, an officer of the parent entity) designated as the sole manager. Day-to-day operational authority is delegated to the officers of Cascadia Renewables Holdings, Inc. pursuant to intercompany management services agreements, as described in Section VIII below.
Limited Purpose / Bankruptcy-Remote Provisions. Several of the project-company operating agreements contain limited-purpose and bankruptcy-remote provisions that were required by project-level lenders. These provisions typically include restrictions on the project company's ability to (i) engage in business activities other than the ownership and operation of the specific facility, (ii) commingle its assets with those of any affiliate, (iii) incur indebtedness other than as permitted under the applicable project financing, (iv) merge, consolidate, or dissolve without lender consent, and (v) file a voluntary bankruptcy petition without the consent of an independent director or special-purpose member. We identified bankruptcy-remote provisions in the operating agreements of seven (7) of the fourteen (14) hydroelectric project companies, specifically those that are subject to outstanding project-level financing (as described in Section XI below).
Capital Contribution Obligations. The operating agreements generally provide that the sole member has no obligation to make additional capital contributions beyond its initial contribution, except as the member may agree in its sole discretion. Certain operating agreements include provisions permitting (but not requiring) additional capital contributions for capital expenditures, working capital needs, or debt service.
Distribution Provisions. Distributions are made at the discretion of the sole member (as sole manager), subject to applicable restrictions in project-level financing documents. The operating agreements do not contain complex distribution waterfall provisions, which is consistent with the single-member structure of the entities.
Project-Level Financing Restrictions. As noted above, several of the hydroelectric project companies are subject to project-level financing arrangements that impose restrictions on transfers, changes of control, and distributions. These restrictions are discussed in greater detail in Section XI below and will be the subject of further analysis in the C&H Memorandum: Review of Debt Commitment Letter (expected date: August 30, 2022). In general, the existing project-level financings will need to be either (i) paid off and discharged at closing, (ii) assumed by the acquiror with lender consent, or (iii) refinanced as part of the acquisition financing package.
VI. Wind Segment Subsidiaries
A. Overview
Cascadia's wind segment comprises six (6) wind farms located across Oregon, Washington, and Idaho. The wind segment represents approximately 30% of Cascadia's consolidated revenue on a trailing twelve-month basis as of March 31, 2022. The wind segment is organized under the intermediate holding company Cascadia Wind Holdings, LLC, a Delaware limited liability company formed on September 14, 2017 (VDR Item 1.2-015). Cascadia Wind Holdings, LLC is wholly owned by Cascadia Renewables Holdings, Inc.
As with the hydroelectric segment, each wind farm is typically held by a separate single-purpose limited liability company. The wind segment differs from the hydroelectric segment, however, in that certain of the wind-farm project companies may have been structured to accommodate tax-equity investors, as discussed in Section VI.C below.
Power-Purchase Agreements. Each wind farm operates under one or more long-term power-purchase agreements ("PPAs") with creditworthy utility and commercial counterparties. The weighted-average remaining life of the PPAs across all contracted assets (wind and hydroelectric combined) is approximately twenty-two (22) years, providing substantial long-term revenue visibility. A detailed review of the PPAs is the subject of the C&H Due Diligence Memorandum: Cascadia Material Contracts Summary (expected date: August 22, 2022).
B. Key Operating Entities
The following table sets forth the principal wind-farm project-company subsidiaries of Cascadia:
Each of the entities listed above is a single-purpose limited liability company, directly or indirectly wholly owned by Cascadia Wind Holdings, LLC, subject to the potential existence of tax-equity structures as discussed below. The aggregate installed capacity across the six wind farms is approximately 715 MW.
C. Tax Equity Structures
Tax-equity financing is a common feature of wind energy projects in the United States, used to monetize production tax credits ("PTCs") under Section 45 of the Internal Revenue Code and/or investment tax credits ("ITCs") under Section 48 of the Internal Revenue Code. In a typical tax-equity structure, an institutional investor (the "tax-equity investor") makes a capital contribution to the project company in exchange for an allocation of the majority of the tax benefits (including depreciation and tax credits) generated by the project during an initial period (the "flip period"), after which the tax-equity investor's share of allocations "flips" to a nominal percentage, and the sponsor (in this case, Cascadia) retains the economic upside and typically has an option to buy out the tax-equity investor's remaining interest at fair market value.
Based on our review of the organizational documents and supplemental information provided by Cascadia management, we have identified potential tax-equity structures at the following wind-farm project companies:
1. Shepherd's Flat Wind, LLC — Tax-equity partnership with National Renewable Energy Finance, LLC (a subsidiary of First National Institutional Investors, Inc.). Formation documents suggest a partnership flip structure with an anticipated flip date in or around 2024.
2. Columbia Gorge Wind, LLC — Tax-equity partnership with Evergreen Tax Credit Fund III, LP. Formation documents suggest a partnership flip structure with an anticipated flip date in or around 2025.
3. Kittitas Ridge Wind, LLC — Possible sale-leaseback structure with Pacific Leasing Corporation. The operating agreement references a master lease agreement, but the lease documents themselves were not located in the VDR as of the date of this memorandum.
We were unable to confirm the current status of these tax-equity structures based solely on the documents available in the VDR, and we have submitted a supplemental information request to RAM (dated August 2, 2022) seeking (i) copies of all tax-equity partnership agreements, flip schedules, and buy-out option agreements; (ii) identification of all tax-equity investors and their current percentage interests; (iii) confirmation of whether any flip events have occurred; and (iv) copies of any consent or notification requirements applicable to a change of control at the sponsor level. This information request remains outstanding as of the date of this memorandum and is listed in Annex E, Item 1.
Change-of-Control Implications. Tax-equity partnership agreements and sale-leaseback structures typically contain change-of-control provisions that may be triggered by the Transaction. These provisions may include (i) requirements for prior written consent of the tax-equity investor to a change of control at the sponsor level, (ii) buy-out rights or put options exercisable upon a change of control, and (iii) "disqualified person" restrictions that prohibit transfers to certain categories of investors (e.g., tax-exempt entities) that cannot utilize the tax benefits. Until we receive and review the tax-equity documents, we are unable to assess the specific change-of-control implications for the Transaction. We have flagged this as a medium-risk item in Section XIII below.
Cross-Reference. The tax implications of the wind-farm tax-equity structures for the Co-Investment Vehicle are addressed in the C&H Memorandum: Tax Structuring Analysis for Co-Investment Vehicle (dated July 20, 2022, prepared by Sylvia Hartwell, Tax Partner, Calderwood & Harkness LLP).
D. Organizational Document Review
C&H has reviewed the available operating agreements and LLC agreements for each of the six wind-farm project-company subsidiaries. Our findings are consistent with those described in Section V.C above for the hydroelectric project companies, with the following additional observations:
• Manager/Member Structure. Where tax-equity structures are present, the project company may be structured as a multi-member LLC (rather than a single-member LLC), with both the Cascadia affiliate (as the "Class A member" or "managing member") and the tax-equity investor (as the "Class B member" or "investor member") holding membership interests. In such cases, the operating agreement governs the allocation of income, loss, and tax credits, as well as the distribution waterfall, which typically provides for preferential distributions to the tax-equity investor during the flip period.
• Distribution Waterfalls. Where tax-equity structures are present, the distribution waterfall may be complex and multi-tiered, with the tax-equity investor receiving a priority return during the flip period and the Cascadia affiliate receiving a subordinated or residual distribution. Post-flip, the distribution waterfall would typically revert to a simpler structure in which the Cascadia affiliate receives the majority of distributions.
• Restrictions on Transfer or Change of Control. As noted above, tax-equity partnership agreements may contain restrictions on the transfer of interests by either member and on changes of control at the sponsor level. These restrictions are an area of particular focus for our diligence review.
• Project Lender Consent Requirements. Several of the wind-farm project companies are subject to project-level financing arrangements that impose restrictions on transfers and changes of control, similar to those identified in the hydroelectric segment. These restrictions are discussed in Section XI below.
VII. Water Infrastructure Segment Subsidiaries
A. Overview
Cascadia's water infrastructure segment comprises three (3) water-treatment concessions located in Oregon. This segment represents the smallest of Cascadia's three business segments by revenue (approximately 15% of consolidated revenue on a trailing twelve-month basis) but provides the highest-quality revenue characteristics, given the essential-service nature of municipal water treatment and the long-term contractual frameworks under which the concessions operate.
The water infrastructure segment is organized under the intermediate holding company Cascadia Water Infrastructure Holdings, LLC, an Oregon limited liability company formed on January 15, 2018 (VDR Item 1.2-030). Cascadia Water Infrastructure Holdings, LLC is wholly owned by Cascadia Renewables Holdings, Inc.
Municipal Water-Service Contracts. Each water-treatment concession operates under a long-term concession agreement with a municipal or regional water authority, providing for the design, construction (where applicable), operation, and maintenance of water-treatment facilities in exchange for availability-based and/or volumetric payments. These concession agreements provide long-term revenue visibility and are underpinned by the essential-service nature of municipal water supply.
The most significant asset in the water infrastructure segment is the Bull Run Filtration Project concession with the Portland Metropolitan Water District. This concession has a forty (40)-year term, originally executed in approximately 2018, and generates annual revenue of approximately $64 million, representing approximately 13% of Cascadia's consolidated revenue. The Bull Run Filtration Project involves the design, construction, operation, and maintenance of a state-of-the-art filtration facility for the Portland metropolitan area's primary water source, the Bull Run Watershed.
B. Key Operating Entities
The following table sets forth the water infrastructure subsidiaries of Cascadia:
Each of the entities listed above is a single-purpose limited liability company, wholly owned by Cascadia Water Infrastructure Holdings, LLC. The Bull Run Filtration Partners, LLC is the most significant entity in this segment and holds the concession agreement that is the subject of the ongoing renegotiation discussion referenced below.
C. Organizational Document Review
C&H has reviewed the operating agreements and LLC agreements for each of the three water infrastructure subsidiaries. The operating agreements are substantially similar in structure and terms to those of the hydroelectric and wind project companies, with single-member, manager-managed structures. Key provisions include:
• Limited Purpose Provisions. Each entity is organized for the sole purpose of holding and performing obligations under its respective concession agreement, consistent with the requirements of the municipal counterparties and any project-level financing.
• Concession Agreements. The concession agreements are assigned to or held directly by the relevant project-company subsidiaries. A detailed review of the concession agreements is the subject of the C&H Due Diligence Memorandum: Cascadia Material Contracts Summary (expected date: August 22, 2022).