MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
TO: Marcus J. Calloway, Founder & Chief Investment Officer, Ironside Capital Management LP Renata Obasi, Senior Managing Director, Infrastructure, Ironside Capital Management LP
FROM: Theresa Kim, Lead Associate, Funds & Asset Management, Calderwood & Harkness LLP Owen Fischer, Working Associate, Funds & Asset Management, Calderwood & Harkness LLP
REVIEWED BY: Pamela Cross, Responsible Partner, Funds & Asset Management, Calderwood & Harkness LLP
DATE: August 22, 2022
RE: Due Diligence Review — Material Contracts of Cascadia Renewables Holdings, Inc. and Subsidiaries
C&H Matter No.: 1023-00001
This memorandum is a privileged and confidential communication prepared by Calderwood & Harkness LLP at the direction of, and for the sole benefit of, Ironside Capital Management LP and its affiliates in connection with the proposed acquisition of Cascadia Renewables Holdings, Inc. This memorandum is protected by the attorney-client privilege and the work product doctrine. It should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP and Ironside Capital Management LP. Disclosure to any third party may result in a waiver of applicable privileges.
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I. Executive Summary
Purpose
This memorandum summarizes the findings of Calderwood & Harkness LLP's ("C&H" or the "Firm") comprehensive review of the material contracts of Cascadia Renewables Holdings, Inc. ("Cascadia," "CRH," or the "Company"), an Oregon corporation headquartered at 1100 SW Sixth Avenue, Suite 1800, Portland, Oregon 97204, in connection with the proposed acquisition of 100% of the outstanding equity interests of Cascadia (the "Transaction") by Cascadia Acquisition Corp. ("Acquisition Corp."), a newly formed Delaware corporation organized for the sole purpose of consummating the Transaction, on behalf of Meridian Infrastructure Partners Fund IV, LP ("Fund IV") and ICM Cascadia Co-Invest, LP ("ICM Co-Invest" or the "Vehicle" and, together with Fund IV, the "Purchasers").
Transaction Context
The Transaction contemplates an aggregate enterprise value of $1,950,000,000 (the "Enterprise Value"), representing approximately 14.1x Cascadia's fiscal year 2021 ("FY 2021") earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately $138 million. For FY 2021, Cascadia reported total revenue of approximately $487 million. The equity value of the Transaction is approximately $1,050,000,000 (the "Equity Value"), reflecting the Enterprise Value less approximately $900 million in net debt. ICM Co-Invest is expected to contribute approximately $300 million (representing 28.57% of total equity) alongside Fund IV's contribution of approximately $750 million (representing 71.43% of total equity). The Transaction is expected to be structured as a purchase of 100% of the equity of Cascadia from Timberline Growth Equity Fund III, LP ("Timberline Fund III") and certain management equity holders (collectively, the "Sellers"), pursuant to an Equity Purchase Agreement (the "EPA") currently under negotiation and expected to be executed on or about September 15, 2022.
Scope of Review
The scope of this memorandum encompasses a review of all contracts identified as material by Cascadia management and/or meeting the $5 million annual value threshold set forth in the due diligence request list (the "Request List") dated July 8, 2022, as supplemented by supplemental requests dated July 22, 2022 and August 5, 2022. The contracts reviewed encompass the following categories:
(a) Power-purchase agreements ("PPAs") related to Cascadia's fourteen (14) hydroelectric facilities;
(b) Power-purchase agreements related to Cascadia's six (6) wind farms;
(c) Water-treatment concession agreements, including the Bull Run Filtration Project concession with the Portland Metropolitan Water District;
(d) Other municipal water-service contracts;
(e) Operations and maintenance ("O&M") agreements;
(f) Fuel supply and interconnection agreements;
(g) Land leases, easements, and site agreements;
(h) Financing documents, including existing credit facilities and note purchase agreements;
(i) Key vendor, service, and equipment supply contracts; and
(j) Insurance contracts and related binders.
Data Room and Source Materials
The documents reviewed in connection with the preparation of this memorandum were accessed through Meridian's virtual data room (the "VDR"), hosted by Blackthorn Advisory Group LLC ("Blackthorn"), financial advisor to Meridian Infrastructure Partners GP, LLC, in connection with the Transaction. The VDR was supplemented by management responses and supplemental document productions provided through Ridgeway, Ashford & Malone PC ("RAM"), counsel to Cascadia (lead partner: Nina R. Castellano), and Garvey Lennox LLP ("Garvey Lennox"), counsel to Timberline Growth Equity Fund III, LP and Timberline Growth Partners LLC (lead partner: Steven F. Yun). Where appropriate, we have referenced specific data room folder and document identification numbers for ease of cross-referencing. Halstead & Greer LLP ("Halstead & Greer"), independent auditor and tax advisor to Cascadia, provided audited financial statements for fiscal years 2019, 2020, and 2021 that have been referenced herein for revenue, EBITDA, and contract value verification purposes.
Key Finding Summary
Based on our review, we note the following key findings, each of which is discussed in greater detail in the sections that follow:
1. Favorable Long-Term Contracted Revenue Base. Cascadia's revenue base is anchored by long-term contracted cash flows with a weighted-average remaining contract life of approximately 22 years, consistent with the infrastructure-style investment thesis underpinning the Transaction. The overwhelming majority of Cascadia's revenue is derived from contracts with remaining terms in excess of 15 years.
2. Public-Sector and Utility Counterparty Concentration. The contract portfolio is heavily concentrated in public-sector and utility off-takers, including regional public utilities, municipal water authorities, and state energy agencies. While this concentration generally supports the creditworthiness of the counterparty base, it also introduces regulatory and political risk factors that merit ongoing monitoring.
3. Change-of-Control and Assignment Provisions Require Careful Navigation. A significant number of material contracts contain change-of-control and/or anti-assignment provisions that will be triggered by the proposed 100% equity acquisition of Cascadia. Obtaining timely consents from the relevant counterparties will be a critical path item for the Transaction's closing timeline.
4. Bull Run Filtration Project Concession Is the Single Largest Contract. The Bull Run Filtration Project concession with the Portland Metropolitan Water District is the single largest individual contract in the Cascadia portfolio by annual revenue, generating approximately $64 million in FY 2021 revenue, or approximately 13% of total FY 2021 revenue of $487 million. This contract presents both concentration risk and regulatory-change risk that warrant heightened attention in the EPA negotiations and the representations and warranties insurance ("R&W Insurance") process.
5. Existing Indebtedness Must Be Retired at Closing. Cascadia's existing indebtedness of approximately $900 million (net) is subject to change-of-control provisions that will require repayment in full at closing.
Cross-References to Other C&H Due Diligence Memoranda
This memorandum should be read in conjunction with the following C&H due diligence memoranda prepared in connection with the Transaction, each of which addresses related matters in greater detail:
• C&H Due Diligence Memorandum: Cascadia Regulatory Permits and Licensing (dated August 18, 2022)
• C&H Due Diligence Memorandum: Cascadia Real Property and Easements (dated August 25, 2022)
• C&H Due Diligence Memorandum: Cascadia Environmental Compliance and Liabilities (dated August 20, 2022)
• C&H Due Diligence Memorandum: Cascadia Litigation and Pending Claims (dated August 19, 2022)
• C&H Due Diligence Memorandum: Cascadia Employment and Benefits (dated August 26, 2022)
• C&H Due Diligence Memorandum: Review of Debt Commitment Letter (dated August 30, 2022)
• C&H Due Diligence Memorandum: Cascadia Tax Structure and Attributes (dated September 1, 2022)
II. Methodology and Scope of Review
II.A. Documents Reviewed
C&H's review was conducted primarily through examination of documents and information posted to the Meridian VDR, which was organized into the following relevant folders and sub-folders:
• Folder 3.0 — Material Contracts (General): Master contract schedule, contract summaries prepared by Cascadia management, and executed versions of material agreements.
• Folder 3.1 — PPAs (Hydroelectric): Executed PPAs, amendments, and related correspondence for Cascadia's fourteen (14) hydroelectric facilities.
• Folder 3.2 — PPAs (Wind): Executed PPAs, amendments, and related correspondence for Cascadia's six (6) wind farms.
• Folder 3.3 — Water-Treatment Concessions: Executed concession agreements, amendments, government approvals, and performance reports for Cascadia's three (3) water-treatment concessions.
• Folder 3.4 — O&M Agreements: Executed O&M agreements, amendments, performance reports, and related correspondence.
• Folder 3.5 — Interconnection and Transmission: Executed interconnection agreements, transmission service agreements, and related correspondence.
• Folder 3.6 — Land Leases and Site Agreements: Executed leases, easements, license agreements, and related title documentation.
• Folder 4.0 — Financing Documents: Existing credit facilities, note purchase agreements, intercreditor agreements, security documents, and related amendments and waivers.
• Folder 7.0 — Insurance: Current insurance policies, binders, and loss-run histories.
• Folder 3.7 — Amendments and Consents: Amendments, consents, waivers, and notices related to contracts in Folders 3.0 through 3.6.
In addition to the VDR documents, C&H reviewed the following materials:
• The management-prepared material contract schedule (the "Material Contracts Schedule"), provided by Sandra K. Llewellyn, Chief Financial Officer of Cascadia, and her finance team on July 15, 2022, and updated on August 8, 2022. The Material Contracts Schedule identifies each contract that Cascadia management considers material to the Company's operations, together with key terms including counterparty, execution date, term, annual revenue or cost, and a brief description of change-of-control provisions.
• Responses to C&H's supplemental due diligence questions (Questions Nos. 1 through 87), transmitted through Breckenridge Sloane & Pratt LLP ("BSP"), counsel to Meridian Infrastructure Partners GP, LLC (lead partner: Charles A. Delacroix), and received on a rolling basis between July 25, 2022 and August 15, 2022.
• Audited financial statements of Cascadia for FY 2019, FY 2020, and FY 2021, prepared by Halstead & Greer LLP, for purposes of revenue and cost verification.
• Draft Equity Purchase Agreement (circulated August 12, 2022) for purposes of cross-referencing defined terms and closing conditions.
In total, C&H reviewed approximately 178 contracts and related documents in connection with the preparation of this memorandum, including principal agreements, amendments, side letters, consents, and related correspondence.
II.B. Materiality Threshold
For purposes of this review, a contract was deemed "material" and included within the scope of our analysis if it satisfied any one or more of the following criteria:
1. The contract generates annual revenues or requires annual expenditures of $5 million or more, based on FY 2021 actual figures or, in the case of recently executed contracts, projected annualized figures;
2. The contract has a remaining term exceeding 10 years as of August 22, 2022;
3. The contract has a governmental or municipal counterparty, regardless of annual value or remaining term; or
4. The contract contains change-of-control, assignment, or consent provisions that would be triggered by the proposed Transaction, regardless of dollar threshold or remaining term.
Contracts that did not satisfy any of the foregoing criteria were excluded from the scope of this review. Cascadia management has represented, through RAM, that no excluded contract is individually material to Cascadia's operations or financial condition.
II.C. Limitations
The following limitations apply to the scope and conclusions of this memorandum:
1. Document Completeness. Our review is based solely on copies of contracts and related documents provided in the VDR and through supplemental productions. While we have requested confirmation from RAM that all material contracts, amendments, and side letters have been produced, we cannot independently verify the completeness of the document production. Certain amendments or side letters may not have been produced to the VDR. We have identified specific gaps in the document production in the relevant sections below and have flagged outstanding requests in our diligence tracker (last updated August 21, 2022).
2. No Independent Counterparty Verification. We have not independently verified the compliance status, financial condition, or creditworthiness of any counterparty to a Cascadia contract. Our assessment of counterparty credit risk is based solely on publicly available information and representations made by Cascadia management.
3. Regulatory Analysis Deferred. Analysis of Oregon, Washington, and Idaho local regulatory requirements applicable to Cascadia's operations, including state public utility commission approvals, water quality regulations, and environmental permits, has been deferred to the C&H Due Diligence Memorandum: Cascadia Regulatory Permits and Licensing (dated August 18, 2022). To the extent regulatory requirements impact the enforceability or performance of material contracts, those issues are addressed at a summary level herein and in greater detail in the regulatory memorandum.
4. No Opinion of Law. This memorandum does not constitute a legal opinion and should not be relied upon as such. The conclusions and risk assessments expressed herein are preliminary in nature and are subject to revision based on additional information, counterparty responses, and the final terms of the EPA and related transaction documents.
III. Overview of Cascadia's Contract Portfolio
III.A. Business Overview
Cascadia Renewables Holdings, Inc. is a vertically integrated renewable energy and water infrastructure company that owns, operates, and maintains a diversified portfolio of infrastructure assets across the Pacific Northwest. As of the date of this memorandum, Cascadia's asset portfolio comprises:
• 14 hydroelectric facilities located across Oregon (8 facilities), Washington (4 facilities), and Idaho (2 facilities), with an aggregate installed capacity of approximately 620 megawatts ("MW");
• 6 wind farms located across Oregon (3 farms), Washington (2 farms), and Idaho (1 farm), with an aggregate installed capacity of approximately 485 MW; and
• 3 water-treatment concessions located in Oregon (2 concessions, including the Bull Run Filtration Project) and Washington (1 concession), serving municipal water authorities under long-term public-private partnership ("P3") structures.
For FY 2021, Cascadia reported total revenue of approximately $487 million and EBITDA of approximately $138 million. Revenue composition by segment was approximately as follows:
The revenue mix reflects a well-diversified portfolio with meaningful contributions from each of Cascadia's three core business segments. Notably, the water-treatment concession segment, while comprising only three individual concessions, generates approximately 26% of total revenue, driven primarily by the scale of the Bull Run Filtration Project concession.
III.B. Weighted-Average Remaining Contract Life
A central element of the investment thesis for the Transaction is the long-duration, contracted nature of Cascadia's revenue streams. To quantify this characteristic, we calculated the weighted-average remaining contract life ("WARCL") across all material contracted revenue streams using the following methodology:
Methodology: For each material contract, we determined the remaining term (in years) as of August 22, 2022, based on the stated expiration date (or, where applicable, the end of the initial term exclusive of renewal options). We then weighted each contract's remaining term by its FY 2021 revenue contribution to calculate a revenue-weighted average across the entire material contract portfolio.
The resulting WARCL for Cascadia's material contracted revenue streams is approximately 22 years.
This figure is broadly consistent with the long-duration infrastructure profile presented by Blackthorn in the Confidential Information Memorandum ("CIM") dated June 2022 and supports the infrastructure-style valuation at approximately 14.1x EV/EBITDA. The 22-year WARCL is underpinned by the long remaining terms of the water-treatment concessions (particularly the Bull Run Filtration Project, with approximately 36 years remaining) and the hydroelectric PPAs (many of which have remaining terms of 20 to 30 years). The wind PPAs, while generally shorter in duration, contribute to the weighted average with remaining terms ranging from 8 to 22 years.
We note that the WARCL calculation does not include the value of unexercised renewal options. If renewal options were included at their full stated terms, the WARCL would increase to approximately 27 years. However, because the exercise of renewal options is not guaranteed and in certain cases is subject to counterparty consent or renegotiation, we have presented the more conservative figure excluding renewal options.
III.C. Counterparty Concentration
Cascadia's contract portfolio is characterized by a high concentration of public-sector and utility counterparties, which is typical for infrastructure assets of this nature. Public utilities, municipal entities, and state agencies constitute approximately 87% of Cascadia's contracted revenue base by value. The remaining approximately 13% is derived from investor-owned utilities and other private-sector counterparties.
The top five counterparties by annual revenue contribution are as follows:
The Portland Metropolitan Water District, as the counterparty to the Bull Run Filtration Project concession, is the single largest counterparty, accounting for approximately $64 million in FY 2021 revenue (approximately 13.1% of total revenue). The concentration risk associated with this counterparty relationship is discussed in detail in Section VI.B below.
The top five counterparties collectively account for approximately 50.9% of Cascadia's total FY 2021 revenue. While this level of concentration is not unusual for an infrastructure company of Cascadia's scale and geographic focus, it underscores the importance of maintaining strong relationships with these key counterparties and of obtaining timely change-of-control consents where required.
All five of the top counterparties are public-sector entities with investment-grade credit profiles (to the extent rated) and long operating histories in the Pacific Northwest region. We do not have specific concerns regarding the creditworthiness of any of these counterparties at this time, although we note that our assessment is based solely on publicly available information and has not been independently verified.
IV. Power-Purchase Agreements (Hydroelectric Facilities)
IV.A. Overview
Cascadia owns and operates fourteen (14) hydroelectric facilities across Oregon, Washington, and Idaho, with an aggregate installed capacity of approximately 620 MW. These facilities generate electricity that is sold to off-takers under long-term PPAs. The hydroelectric PPA portfolio is the largest individual revenue segment for Cascadia, generating aggregate PPA revenue of approximately $224 million in FY 2021, representing approximately 46.0% of total FY 2021 revenue.
As of the date of this memorandum, there are nineteen (19) distinct PPAs in force across the fourteen hydroelectric facilities. Certain facilities are subject to more than one PPA (e.g., where output is allocated among multiple off-takers), while certain PPAs cover the output of more than one facility. The remaining terms of the hydroelectric PPAs range from approximately 7 years (Clearwater Falls PPA No. 2 with Idaho Power Resources, Inc., expiring December 31, 2029) to approximately 33 years (Elkhorn Creek PPA with Pacific Northwest Electric Cooperative, expiring June 30, 2055). The revenue-weighted average remaining term for the hydroelectric PPA portfolio is approximately 23 years.
Counterparties to the hydroelectric PPAs include regional public utility districts, municipal electric utilities, investor-owned utilities, and state energy agencies. The counterparty base is predominantly public-sector, with approximately 82% of hydroelectric PPA revenue derived from public utility and municipal off-takers.
IV.B. Key Terms Common to Hydroelectric PPAs
The following key terms and provisions are common across the hydroelectric PPA portfolio, with certain variations noted where material:
Pricing and Escalation Mechanisms
The hydroelectric PPAs employ a mix of fixed-price and escalating-price structures. Approximately 63% of hydroelectric PPA revenue (by FY 2021 value) is derived from PPAs with Consumer Price Index ("CPI")-based annual escalation mechanisms, typically tied to the U.S. Bureau of Labor Statistics CPI-U (All Urban Consumers, U.S. City Average) with escalation applied annually on the contract anniversary date. Escalation rates under CPI-linked PPAs are generally uncapped but subject to a floor of 0% (i.e., no downward adjustment in periods of deflation).
The remaining approximately 37% of hydroelectric PPA revenue is derived from PPAs with fixed-step escalators, under which the contract price per megawatt-hour ("MWh") increases by a predetermined fixed percentage (typically 1.5% to 2.5% per annum) on each contract anniversary date. Fixed-step escalators provide greater price certainty but may result in pricing that diverges from actual inflation over long contract terms.
Across the portfolio, the current weighted-average price under the hydroelectric PPAs is approximately $38.50 per MWh (based on FY 2021 data), which is broadly competitive with prevailing Pacific Northwest wholesale electricity prices for hydroelectric generation.
Delivery Obligations. The hydroelectric PPAs employ two principal delivery structures:
• Must-Take / Full-Output PPAs: Under these agreements, the off-taker is obligated to purchase and pay for all electricity generated by the applicable facility (subject to curtailment provisions), regardless of the off-taker's actual demand. Approximately 71% of hydroelectric PPA revenue is derived from must-take or full-output structures. These agreements provide Cascadia with significant revenue certainty, as the off-taker bears volume risk.
• As-Available PPAs: Under these agreements, the off-taker purchases electricity as and when available from the applicable facility, with payment obligations limited to actual deliveries. The off-taker retains the right to refuse deliveries under specified circumstances (e.g., during periods of negative pricing or system congestion). Approximately 29% of hydroelectric PPA revenue is derived from as-available structures. While as-available PPAs expose Cascadia to somewhat greater volume risk, the historical utilization rates under these agreements have been consistently high (averaging approximately 94% of available capacity over the 2019–2021 period), reflecting the baseload nature of Cascadia's hydroelectric generation.
Curtailment Provisions and Compensation Mechanics
All nineteen hydroelectric PPAs contain curtailment provisions addressing situations in which the off-taker or the applicable transmission provider directs Cascadia to reduce or cease generation. The curtailment provisions generally distinguish between:
• Economic curtailment: Curtailment requested by the off-taker for economic reasons (e.g., negative pricing, excess supply). Under the majority of the hydroelectric PPAs (14 of 19), the off-taker is required to compensate Cascadia for economic curtailment at the full contract price for the curtailed energy. Under the remaining five PPAs, compensation is limited to a reduced rate (typically 50% to 75% of the contract price).
• Reliability curtailment: Curtailment directed by the transmission provider or system operator for reliability or system integrity reasons. Compensation for reliability curtailment varies more significantly across the portfolio, with some PPAs providing full compensation and others limiting compensation to documented direct costs.
• Force majeure curtailment: Curtailment resulting from force majeure events (see below). Generally, neither party bears liability for force majeure curtailment, and Cascadia's delivery obligations and the off-taker's payment obligations are suspended during the force majeure period.
Force Majeure Definitions and Consequences
Force majeure provisions are present in all nineteen hydroelectric PPAs. The definitions of force majeure are broadly consistent across the portfolio and generally include acts of God, natural disasters, floods, droughts, earthquakes, fires, storms, epidemics, wars, acts of terrorism, government actions (including changes in law), and other events beyond the reasonable control of the affected party. Notably, the force majeure definitions in the hydroelectric PPAs generally do not include changes in electricity market prices, variations in hydrology or water flow, or equipment failures resulting from inadequate maintenance, each of which is expressly excluded from the definition in the majority of the agreements.
The consequences of a force majeure event are generally suspension of performance obligations for the duration of the event, with an obligation on the affected party to use commercially reasonable efforts to mitigate and restore performance. Extended force majeure events (typically exceeding 12 to 18 months) give rise to termination rights for either party in most of the agreements.
FERC Licensing Linkage
Cascadia's hydroelectric facilities are subject to licenses issued by the Federal Energy Regulatory Commission ("FERC") under the Federal Power Act. The hydroelectric PPAs generally reference the continued validity of the applicable FERC hydroelectric license as a condition to Cascadia's performance obligations. Several PPAs expressly provide that the expiration, revocation, or material modification of the applicable FERC license constitutes a termination event.
In connection with the Transaction, Cascadia has filed an application with FERC under Section 203 of the Federal Power Act (FERC Docket No. EC22-143-000) for approval of the transfer of the FERC licenses to Acquisition Corp. (or its designated subsidiary) upon consummation of the Transaction. The Section 203 application was filed on October 19, 2022, and is currently pending. The status of the FERC application is addressed in greater detail in the C&H Due Diligence Memorandum: Cascadia Regulatory Permits and Licensing (dated August 18, 2022).
IV.C. Change-of-Control / Assignment Provisions
The change-of-control and assignment provisions across the hydroelectric PPA portfolio present a complex landscape that requires careful navigation in connection with the Transaction. We summarize the key findings below:
Consent Requirements. Of the nineteen (19) hydroelectric PPAs, the change-of-control and assignment provisions can be categorized as follows:
The eleven PPAs requiring affirmative counterparty consent represent approximately $152 million in annual revenue, or approximately 67.9% of total hydroelectric PPA revenue. These consent requirements are generally triggered by a "change of control" of Cascadia, which is defined in the relevant PPAs to include, among other things, the transfer of 50% or more of the equity interests in Cascadia to a new owner or group of owners acting in concert. The proposed Transaction, which involves the acquisition of 100% of Cascadia's equity, will clearly trigger these consent requirements.
Anti-Assignment Clauses. In addition to the change-of-control provisions, many of the hydroelectric PPAs contain anti-assignment clauses that prohibit Cascadia from assigning its rights and obligations under the PPA without the counterparty's prior written consent. A threshold question is whether the proposed Transaction—structured as a 100% equity acquisition of Cascadia rather than an asset transfer—constitutes an "assignment" under the specific language of each PPA.
Based on our review, we note the following:
• Seven (7) of the eleven consent-required PPAs define "assignment" broadly to include any direct or indirect transfer of control of the contracting party, such that the equity acquisition of Cascadia would be treated as an assignment requiring consent regardless of whether Cascadia itself remains the contracting party.
• Four (4) of the eleven consent-required PPAs define "assignment" more narrowly, limited to direct transfers of the contract rights themselves. Under these agreements, the equity acquisition of Cascadia may not technically constitute an "assignment," but the separate change-of-control provision would nonetheless require consent.
• For the five (5) notice-only PPAs, the notice provisions generally require written notification to the counterparty within 30 days of the closing of the Transaction, with copies of relevant organizational documents of the acquiring entity.
Assessment of Consent Risk
Based on our review of the relevant PPA provisions and our experience with similar transactions in the Pacific Northwest renewable energy sector, we assess the risk of failing to obtain the required consents as moderate overall, with variation by counterparty. We note the following considerations:
• Favorable factors: Cascadia has long-standing relationships with its PPA counterparties, and the Transaction represents a change from one institutional private equity sponsor (Timberline Growth Equity Fund III) to another (Meridian/Ironside). There is no change in the operating entity or management team (to the extent management rolls over equity), and no change in the physical operations of the facilities. Counterparties are generally incentivized to provide consent because the PPAs are priced at favorable terms (relative to current market rates) that the counterparties would not want to lose.
• Risk factors: Certain public utility counterparties have historically been slow to process consent requests, and the consent process may require board-level approval, which can introduce delays. In addition, counterparties may attempt to use the consent process as leverage to renegotiate unfavorable pricing or other terms. We are aware of at least one precedent transaction in the Pacific Northwest in which a public utility counterparty conditioned its consent on a pricing concession, although the concession was ultimately modest (approximately $0.50/MWh).
We recommend that the consent solicitation process for the hydroelectric PPAs be initiated as early as practicable following the execution of the EPA, and ideally in parallel with the FERC Section 203 application process. The timing and sequencing of consent solicitations is discussed further in Section XIV.D below.
IV.D. Termination Provisions
The termination provisions across the hydroelectric PPA portfolio can be summarized as follows:
Termination for Convenience
Four (4) of the nineteen hydroelectric PPAs, all with municipal off-taker counterparties, contain termination-for-convenience provisions that allow the counterparty to terminate the PPA upon prior written notice (ranging from 12 to 24 months) without cause. These four PPAs represent aggregate FY 2021 revenue of approximately $31 million. In the event of a termination for convenience, the terminating counterparty is generally required to pay Cascadia a termination fee calculated as the net present value of the remaining contracted revenue stream, discounted at the applicable federal rate plus a spread of 100 to 200 basis points. The termination fee provisions provide meaningful economic protection against early termination, although we note that the enforceability of termination fees in excess of actual damages may be subject to challenge under Oregon and Washington law as unenforceable penalty clauses.
Termination for Default
All nineteen hydroelectric PPAs contain termination-for-default provisions that allow either party to terminate the PPA upon a material default by the other party, subject to cure periods. Cure periods range from 30 to 90 days for monetary defaults (i.e., failure to make payment when due) and 60 to 180 days for non-monetary defaults (i.e., failure to perform material obligations other than payment). Materiality thresholds for defaults vary across the portfolio, with some PPAs requiring a "material breach" and others specifying quantitative thresholds (e.g., failure to deliver at least 80% of guaranteed minimum output for three consecutive months).
Termination Upon Regulatory Disqualification
As noted above, several hydroelectric PPAs provide for termination upon the expiration, revocation, or material modification of the applicable FERC hydroelectric license. In addition, certain PPAs provide for termination if Cascadia ceases to qualify as an "eligible renewable energy resource" under the applicable state's renewable portfolio standard ("RPS") program.
IV.E. Notable Individual Hydroelectric PPAs
The following table summarizes the five largest individual hydroelectric PPAs by FY 2021 revenue:
We note that the Clearwater Falls PPA No. 2 (the companion PPA at the Clearwater Falls facility with Idaho Power Resources, Inc.) has the shortest remaining term in the hydroelectric PPA portfolio, expiring on December 31, 2029 (approximately 7 years). This PPA generates annual revenue of approximately $8 million. The PPA contains a two-year renewal option exercisable by mutual agreement of the parties, but neither automatic renewal nor unilateral renewal rights are available. Cascadia management has indicated, through RAM, that discussions regarding renewal of Clearwater Falls PPA No. 2 are expected to commence in 2027. The potential non-renewal of this PPA is not considered material in the context of Cascadia's overall revenue base, but it should be factored into long-term cash flow projections.
No other hydroelectric PPAs have terms expiring within the next five years. Three additional PPAs have terms expiring between 2030 and 2035, with aggregate annual revenue of approximately $18 million. Each of these PPAs contains either automatic renewal provisions (subject to non-renewal notice requirements) or mutual renewal options.
V. Power-Purchase Agreements (Wind Farms)
V.A. Overview
Cascadia owns and operates six (6) wind farms across Oregon (3 farms), Washington (2 farms), and Idaho (1 farm), with an aggregate installed capacity of approximately 485 MW. Electricity generated by the wind farms is sold to off-takers under long-term PPAs. The wind PPA portfolio generated aggregate revenue of approximately $112 million in FY 2021, representing approximately 23.0% of total FY 2021 revenue.
As of the date of this memorandum, there are ten (10) distinct PPAs in force across the six wind farms. The remaining terms of the wind PPAs range from approximately 8 years (Ridgeline Mesa PPA with Bonneville Basin Energy Authority, expiring March 31, 2030) to approximately 22 years (Cascade Plateau PPA with Puget Sound Municipal Energy Agency, expiring December 31, 2044). The revenue-weighted average remaining term for the wind PPA portfolio is approximately 17 years, which is shorter than the hydroelectric PPA portfolio (approximately 23 years) but still consistent with long-duration infrastructure investment characteristics.
Counterparties to the wind PPAs include public utility districts, municipal energy agencies, and investor-owned utilities. The counterparty base is somewhat more diversified than the hydroelectric portfolio, with no single counterparty accounting for more than approximately 15% of wind PPA revenue.
V.B. Key Terms Common to Wind PPAs
Pricing Structure. The wind PPAs uniformly employ fixed-price-per-MWh pricing structures with annual escalators. Unlike the hydroelectric PPA portfolio, which includes a mix of CPI-based and fixed-step escalators, the wind PPAs are predominantly structured with fixed-step escalators at rates ranging from 1.5% to 2.75% per annum. Only two wind PPAs (representing approximately 18% of wind PPA revenue) utilize CPI-based escalation. The current weighted-average price under the wind PPAs is approximately $42.75 per MWh (based on FY 2021 data), reflecting the somewhat higher marginal cost of wind generation relative to Cascadia's hydroelectric assets.
Production Guarantees and Shortfall Penalties
A key distinction between the wind PPAs and the hydroelectric PPAs is the presence of production guarantee provisions in the wind agreements. Eight of the ten wind PPAs require Cascadia to deliver a minimum annual energy output (typically expressed as a percentage of projected annual energy production, or "P50," ranging from 85% to 90% of P50). If Cascadia fails to deliver the guaranteed minimum output in any contract year, Cascadia is required to pay the off-taker a shortfall penalty calculated as:
Shortfall Penalty = (Guaranteed Minimum MWh – Actual Delivered MWh) × Contract Price per MWh × Penalty Multiplier
Penalty multipliers range from 0.75x to 1.25x the contract price across the portfolio. In practice, Cascadia has not incurred material shortfall penalties in any of the past three fiscal years (FY 2019–2021), as actual production has consistently exceeded the guaranteed minimum thresholds. However, we note that production variability inherent in wind generation creates ongoing exposure to shortfall penalties in below-average wind years.
Renewable Energy Certificate (REC) Ownership and Transfer
All ten wind PPAs address the ownership and transfer of Renewable Energy Certificates ("RECs") generated by the applicable wind farm. The provisions can be categorized as follows:
• Bundled RECs (7 PPAs): The RECs are bundled with the physical energy delivery and transferred to the off-taker as part of the PPA. The contract price per MWh includes the value of the associated RECs. These provisions are typical of PPAs executed with public utilities seeking to meet state RPS requirements.
• Retained RECs (3 PPAs): Cascadia retains ownership of the RECs and has the right to sell them separately on the open market or to third-party REC purchasers. In these cases, the contract price per MWh is typically lower, as it reflects only the value of the physical energy without the associated environmental attributes.
The allocation of REC ownership has implications for Cascadia's revenue and for the off-takers' ability to count the wind energy toward their respective RPS compliance obligations. We do not identify any material issues with the REC provisions in the wind PPA portfolio, but we note that changes in state RPS programs or in REC market pricing could affect the relative economics of the retained-REC PPAs.
Interconnection Agreement Linkage
Each wind PPA is linked to a corresponding interconnection agreement (discussed in detail in Section VIII below) that governs the physical connection of the wind farm to the transmission grid. The wind PPAs generally provide that Cascadia's delivery obligations are conditioned on the continued availability of interconnection service and that curtailment resulting from interconnection constraints is subject to the curtailment compensation provisions described below.
Force Majeure and Curtailment
The force majeure and curtailment provisions in the wind PPAs are broadly similar to those in the hydroelectric PPAs, with certain wind-specific modifications. Notably, the force majeure definitions in the wind PPAs generally include unusually severe weather events that result in wind speeds outside the operating range of the turbines (either too high or too low), whereas the hydroelectric PPA force majeure definitions do not typically include hydrological variations. Curtailment compensation provisions in the wind PPAs are generally consistent with those in the hydroelectric portfolio, with full compensation for economic curtailment and partial or no compensation for reliability curtailment.
V.C. Change-of-Control / Assignment Provisions
The change-of-control and assignment provisions in the wind PPA portfolio are generally comparable to those in the hydroelectric portfolio, with the following distribution:
The six wind PPAs requiring affirmative counterparty consent represent approximately $74 million in annual revenue, or approximately 66.1% of total wind PPA revenue. The change-of-control definitions and anti-assignment clause structures are substantially similar to those described in Section IV.C above for the hydroelectric PPAs.
Our assessment of the counterparty consent risk for the wind PPAs is consistent with our assessment for the hydroelectric PPAs: moderate overall, with a favorable bias given the long-standing counterparty relationships and the market-competitive pricing under the existing agreements. We recommend that consent solicitations for the wind PPAs be conducted in parallel with those for the hydroelectric PPAs.
V.D. Termination Provisions
The termination provisions in the wind PPA portfolio are broadly consistent with those in the hydroelectric portfolio. Two wind PPAs (both with municipal energy agency counterparties) contain termination-for-convenience provisions with 18-month notice requirements and termination fee provisions. All ten wind PPAs contain termination-for-default provisions with cure periods consistent with the ranges described in Section IV.D above.
One notable wind PPA-specific termination trigger relates to Production Tax Credit ("PTC") eligibility: two wind PPAs provide that if the applicable wind farm ceases to qualify for federal PTCs under Section 45 of the Internal Revenue Code, either party may elect to renegotiate the contract price. If the parties are unable to agree on a revised price within 120 days, the PPA terminates automatically. As of the date of this memorandum, Cascadia's wind farms that are subject to these PTCs are fully eligible, but the PTC provisions should be monitored in the context of evolving federal energy tax policy.
V.E. Notable Individual Wind PPAs
The following table summarizes the three largest individual wind PPAs by FY 2021 revenue:
We note that the Ridgeline Mesa PPA with Bonneville Basin Energy Authority has the shortest remaining term in the wind PPA portfolio, expiring on March 31, 2030 (approximately 8 years). This PPA generates annual revenue of approximately $9 million. The PPA contains a mutual renewal option for a five-year extension, exercisable by notice at least 18 months prior to expiration. Cascadia management has indicated that it expects the renewal option to be exercised by mutual agreement, although no formal discussions have commenced. As with the Clearwater Falls PPA No. 2 discussed in Section IV.E, the potential non-renewal of this PPA is not individually material but should be factored into projections.
VI. Water-Treatment Concession Agreements
VI.A. Overview
Cascadia holds three (3) long-term water-treatment concession agreements with municipal water authorities in Oregon and Washington, structured as public-private partnerships ("P3 arrangements"). The water-treatment concession segment generated aggregate revenue of approximately $127 million in FY 2021, representing approximately 26.1% of total FY 2021 revenue.
The three concessions are as follows:
The Bull Run Filtration Project alone accounts for approximately $64 million in FY 2021 revenue, representing approximately 50.4% of total water-treatment concession revenue and approximately 13.1% of total Cascadia FY 2021 revenue. It is the single largest individual contract in the Cascadia portfolio by annual revenue.
The concession model employed by Cascadia involves long-term agreements with municipal counterparties under which Cascadia designs, builds (or upgrades), finances, operates, and maintains water-treatment infrastructure in exchange for availability-based payments over the concession term. At the end of the concession term, the infrastructure assets are transferred to the municipal counterparty in accordance with hand-back conditions specified in the concession agreement. This model is consistent with standard P3 structures used in the municipal water sector.
VI.B. Bull Run Filtration Project Concession
VI.B.1. Counterparty and Background
The Bull Run Filtration Project concession (the "Bull Run Concession") is the centerpiece of Cascadia's water-treatment concession portfolio and the single most significant individual contract in the Company's overall contract portfolio. Key background information is as follows:
Counterparty: Portland Metropolitan Water District (the "PMWD"), a municipal water authority organized under Oregon Revised Statutes Chapter 264, responsible for the treatment and distribution of drinking water to approximately 950,000 residents in the Portland metropolitan area.
Original Execution Date: April 16, 2018.
Effective Date: August 1, 2018 (upon satisfaction of conditions precedent).
Term: Forty (40) years from the effective date, expiring approximately July 31, 2058 (subject to earlier termination as described below). The remaining term as of the date of this memorandum is approximately 36 years.
Annual Revenue: Approximately $64 million in FY 2021, representing approximately 13.1% of Cascadia's total FY 2021 revenue of $487 million and the single largest individual contract in the Cascadia portfolio by annual revenue.
Background: The Bull Run Filtration Project was initiated in response to a 2017 compliance order issued by the Oregon Health Authority ("OHA") requiring the PMWD to construct a filtration facility for the Bull Run watershed, Portland's primary drinking water source, by January 1, 2027. The PMWD selected Cascadia through a competitive procurement process to design, build, finance, operate, and maintain the filtration facility under a 40-year concession agreement. The project involves the construction of a new 150 million gallon-per-day ("MGD") filtration plant and associated distribution infrastructure. The construction phase was completed in November 2021, and the facility achieved commercial operations on December 15, 2021. The facility is currently operating at approximately 78% of design capacity.
VI.B.2. Key Commercial Terms
The principal commercial terms of the Bull Run Concession are as follows:
Availability-Based Payment Structure. The PMWD makes monthly availability payments to Cascadia based on the demonstrated availability and performance of the filtration facility. The availability payment is calculated as the product of (i) the base monthly payment amount (as adjusted for escalation), (ii) an availability factor (reflecting the percentage of time during the applicable month that the facility was available to treat water at or above the minimum specified capacity), and (iii) a performance factor (reflecting the facility's compliance with water quality standards and performance metrics specified in the concession agreement).
The availability factor is calculated on a monthly basis, with deductions applied for periods of planned maintenance (subject to a maximum of 15 planned maintenance days per contract year without deduction) and unplanned outages. The performance factor incorporates metrics related to treated water quality (turbidity, disinfection byproducts, pH, and other parameters), environmental discharge compliance, and response times for operational events.
Base Payment Amount and Escalation. The base monthly payment amount for the first contract year was approximately $4.8 million (annualized to approximately $57.6 million). The base payment is subject to an annual escalation mechanism comprising:
(a) A fixed component equal to 40% of the base payment, escalated annually at a fixed rate of 2.0% per annum; and
(b) A variable component equal to 60% of the base payment, escalated annually by reference to the CPI-U (Portland-Salem, OR-WA, All Items), with a floor of 0% and a cap of 4.5% per annum.