As filed with the Securities and Exchange Commission on January 14, 2022.
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DESRI Inc.
(Exact name of registrant as specified in its charter)
Delaware | | | 4911 | | | 87-2422194 |
(State or other jurisdiction of incorporation or organization) | | | (Primary Standard Industrial Classification Code Number) | | | (I.R.S. Employer Identification Number) |
1166 Avenue of the Americas, Ninth Floor
New York, NY 10036
(212) 478-0000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Russell C. Petrella, Jr., Esq.
1166 Avenue of the Americas, Ninth Floor
New York, NY 10036
(212) 478-0000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Andrea L. Nicolas, Esq. Michael J. Hong, Esq. Victoria R. Hines, Esq. Skadden, Arps, Slate, Meagher & Flom LLP One Manhattan West New York, New York 10001 (212) 735-3000 | | | Greg P. Rodgers David J. Miller Ryan J. Lynch Latham & Watkins LLP 1271 Avenue of the Americas New York, NY 10020 (212) 751-4864 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | | | ☐ | | | Accelerated filer | | | ☐ |
Non-accelerated filer | | | ☒ | | | Smaller reporting company | | | ☐ |
Emerging growth company | | | ☒ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered | | | Proposed Maximum Aggregate Offering Price(1) | | | Amount of Registration Fee |
Common stock, $0.01 par value per share | | | $100,000,000 | | | $9,270 |
| 1) | Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes the aggregate offering price of additional shares that the underwriters have the option to purchase. |
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and neither we are soliciting offers to buy these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS | | | Subject to completion, dated , 2022 |
Shares
Common Stock
This is the initial public offering of shares of common stock of DESRI Inc. We are offering shares of our common stock and the selling stockholders identified in this prospectus are offering shares of our common stock. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.
We expect the public offering price to be between $ and $ per share of common stock. Currently, no public market exists for our common stock. We have applied to list our common stock on the Nasdaq Global Select Market, or Nasdaq, under the symbol “DESR.”
We will be a “controlled company” as defined under the corporate governance rules of Nasdaq. See “Management—Controlled Company Exemption” and “Principal and Selling Stockholders.”
We will be a holding company (as defined under the Public Utility Holding Company Act of 2005, or PUHCA) with U.S. operating subsidiaries that are “public utilities” (as defined in the Federal Power Act, or FPA) and, therefore, subject to the jurisdiction of the U.S. Federal Energy Regulatory Commission, or FERC, under the FPA. The FPA places certain restrictions and requirements on the transfer of an amount of our voting securities sufficient to convey direct or indirect control over us or our public utility operating subsidiaries. See “Risk Factors—Risks Related to this Offering and Ownership of our Common Stock.”
We are an “emerging growth company” as defined under the U.S. federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements for this and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”
Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 27 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
| | | Per Share | | | Total | |
Initial public offering price | | | $ | | | $ |
Underwriting discounts and commissions(a) | | | $ | | | $ |
Proceeds, before expenses, to us | | | $ | | | $ |
Proceeds, before expenses, to the selling stockholders | | | $ | | | $ |
| (a) | See “Underwriting” for a description of all underwriting compensation payable in connection with this offering. |
We and the selling stockholders have granted the underwriters an option to purchase up to additional shares of common stock, at the initial public offering price, less the underwriting discounts and commissions, for 30 days after the date of this prospectus.
The underwriters expect to deliver the shares of common stock against payment on or about , 2022.
Book-Running Manager
Goldman Sachs & Co. LLC | | | BofA Securities |
Prospectus dated , 2022.
TABLE OF CONTENTS
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | |
Through and including , 2022 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to any unsold allotment or subscription.
Neither we, the selling stockholders nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any related free writing prospectuses. Neither we nor any of the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares of common stock offered by this prospectus, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date regardless of the time of delivery of this prospectus or any sale of shares of common stock. Our business, financial condition, results of operations, and prospects may have changed since that date.
For investors outside of the United States: Neither we, the selling stockholders nor any of the underwriters have done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.
i
Basis of Presentation
Certain monetary amounts, percentages, and other figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.
Organizational Structure
We have obtained all necessary FERC approvals under FPA Section 203 for, and undertake, certain organizational transactions to reorganize our corporate structure. Unless otherwise stated or the context otherwise requires, all information in this prospectus reflects the consummation of the organizational transactions described in the section titled “Organizational Structure,” including this offering, which we refer to, collectively, as the “Reorganization Transactions.”
Market and Industry Data
We obtained the industry, market, and competitive position data used throughout this prospectus from our own internal estimates as well as from industry publications and research, surveys, and studies conducted by third parties, including Bloomberg New Energy Finance, the United States Energy Information Administration, and Wood Mackenzie. Industry publications, studies, and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe our internal company research is reliable and the market definitions are appropriate, neither such research nor these definitions have been verified by any independent source. Estimates of historical growth rates in the markets where we operate are not necessarily indicative of future growth rates in such markets. In addition, projections, assumptions, and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the projections and estimates made by independent third parties and us contained in this prospectus.
Trademarks
This prospectus includes trademarks, such as the DESRI Inc. name and the DESRI Inc. logo, which are protected under applicable intellectual property laws and are the property of DESRI Inc. or its affiliates. This prospectus also contains trademarks, service marks, copyrights, and trade names of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trademarks, service marks, copyrights, or trade names to imply a relationship with, or endorsement or sponsorship of us by, any unaffiliated companies. Solely for convenience, the trademarks and tradenames of DESRI Inc. or its affiliates referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that they will not assert, to the fullest extent under applicable law, their rights or the right of the applicable licensor to these trademarks and tradenames.
ii
Glossary
The following is a summary of certain defined terms and concepts that we use throughout this prospectus:
| • | Project refers to a renewable energy generation or storage asset, or a development-stage asset that may become a renewable energy generation or storage asset. When determining what assets constitute a single project, our management team evaluates a number of factors, including the offtake, interconnection, financing, construction, and other arrangements for the asset, the geographic location of the asset, and actual or expected dates of the asset’s milestones, such as the start of construction and commercial operation date. We transition a project from pre-construction to construction once on-site construction work has started at the project or the project has obtained construction financing. We transition a project from construction to operational once the entire project has achieved commercial operations. |
| • | PPA refers to power purchase or similar agreement. Under a PPA, a project sells electricity (and, in some cases, other related products) to a counterparty, which we refer to as the offtaker. Most frequently, our PPAs are busbar PPAs that provide for a fixed price for the delivery of electricity at the point where the project interconnects to the electric grid. As a comparison, non-busbar PPAs base their price on a location (or a calculated price over multiple locations) different from project’s interconnection point to the grid. |
In contrast to many of our competitors, we do not own or operate any merchant projects, which are projects that sell electricity into the market at variable prices without a PPA.
| • | BTA refers to a build transfer or similar agreement. Under a typical BTA arrangement, we agree to sell a developed project to a counterparty (typically a large investor-owned utility) during construction or shortly after achieving commercial operations. Although this approach is not fully aligned with our core business model of owning and operating long-term contracted assets, our ability to efficiently procure equipment and source contractors makes this a profitable approach to project development in regions where mandates have been established to encourage utility-ownership of projects and can help enhance our relationships with counterparties. |
| • | We refer to origination of a project as the creation of a commercial opportunity through the execution of a PPA or BTA for one of our projects or the acquisition of a development project from a third-party with a signed PPA. We refer to a project that has a signed PPA or BTA as a contracted project and project without a signed PPA or BTA as an uncontracted project. |
| • | In addition to electricity (and, in some cases, other related products), we typically also sell renewable energy credits, or RECs, under our PPAs. RECs are a market-based instrument that represents the property rights to the environmental, social and other non-power attributes of renewable electricity generation. RECs are issued when electricity is generated and delivered to the electric grid from a renewable energy resource, such as a solar or wind project. |
| ○ | While we usually sell RECs to the PPA counterparty, in some cases we sell a project’s RECs on a standalone basis either under a separate contract or in the merchant market. We describe the separation of RECs (and other revenue streams and ancillary products) from the sale of electricity as disaggregation, which has been a growing industry trend. |
| • | NAV refers to net asset value, which represents total expected value of our contracted projects and other assets and liabilities over the course of their useful life, discounted to the measurement date. NAV is the primary metric utilized by our management team for investment decisions and for gauging the success of our business strategy. |
| • | Units of measure: |
| ○ | MW refers to a megawatt, or 1,000,000 watts, of electricity and GW refers to a gigawatt, or 1,000 MW. As used in this prospectus, all references to MW or GW refer to measurements of alternating current unless otherwise indicated. |
| ○ | MWh refers the amount of electricity generated by a one MW electric generator producing electricity for one hour. |
iii
| • | Utility-scale projects are the primary focus of our business. We consider a new project to be utility scale if it is 20 MW or larger and delivers energy to the grid—this threshold has increased over the last decade and we expect it to continue to increase in the future. |
| • | Curtailment is the reduction of output of a project below what it could have otherwise produced by its offtaker, interconnecting transmission owner, or regional transmission organization, or ISO. A project’s delivery of electricity may be subject to curtailment or other restrictions for various reasons, including for system maintenance or reliability and stability purposes, over-generation, or due to transmission limitations, congestion, emergencies, or force majeure circumstances. Curtailment may be compensated in certain circumstances under a project’s PPA and may be uncompensated in other circumstances. |
| • | Gross MW, or Gross MW Capacity, represent the maximum output of energy measured in MWs across the contracted portfolio that can be sold under PPAs or delivered to the grid. |
| • | Net MW, or Net MW Capacity, represent the portion of the gross MW capacity owned by us after accounting for equity interests owned by co-investors in our projects. We often sell minority noncontrolling interests in our projects around the time of construction completion to monetize a portion of the value created through the development and construction of these projects, and to provide liquidity that enables our investments in new projects through the efficient recycling of capital. Further, certain projects also have co-investments from developers we co-developed those projects with. |
Unless otherwise stated or the context otherwise requires, figures related to our projects, including capacity and production, include all projects fully or partially owned by us and fully or partially owned by investment funds or other vehicles managed by us or our affiliates.
iv
Some of the information in this prospectus may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act. Forward-looking statements give our current expectations, projections, or forecasts of our results of operations, financial condition, or future events. Words such as “could,” “will,” “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or “continue” and similar expressions are used to identify forward-looking statements. Without limiting the generality of the foregoing, forward-looking statements contained in this prospectus include our expectations of plans, strategies, objectives, growth, and anticipated financial and operational performance. Forward-looking statements can be affected by assumptions used or by known or unknown risks or uncertainties.
The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, NAV, financial condition, and results of operations. Forward-looking statements involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We believe that these factors include, but are not limited to, the factors set forth under the heading “Risk Factors.” Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus forms a part with the understanding that our actual future results, levels of activity, performance, and achievements may be materially different from what we expect. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.
In addition, our NAV is calculated based on certain assumptions and estimates for future periods and is subject to the same risks and uncertainties as the forward-looking statements included in this prospectus. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
These forward-looking statements speak only as of the date of this prospectus. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this prospectus after we distribute this prospectus, whether as a result of any new information, future events, or otherwise.
v
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider before making an investment decision. You should read the entire prospectus carefully, including the sections entitled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus, before making an investment decision. Unless otherwise indicated or the context otherwise requires, all references in this prospectus to “we,” “us,” “our,” the “Company,” “DESRI,” and similar terms refer to DESRI Holdings, L.P. or to DESRI Inc. (depending on whether the statement relates to the period before or after the Reorganization Transactions) and, in each case, its direct and indirect subsidiaries as a combined entity immediately following the Reorganization Transactions. See “About this Prospectus—Glossary” for definitions of certain terms used herein and “About this Prospectus—Basis of Presentation” for additional terms and the basis for certain information used herein.
About DESRI
Our Mission
We are committed to building the renewable energy infrastructure necessary to support the decarbonization of electric power generation in the United States. We have created a competitive and resilient company and are dedicated to delivering value to our shareholders that is as sustainable as our product.
Overview
We are a top-five, pure-play, renewable energy independent power producer, or IPP, in the United States based on total gross capacity of operating projects as of September 30, 2021, according to Wood Mackenzie. We develop, construct, own, and operate high-quality renewable energy projects across the country. Since 2010, we have been building a dynamic company that we believe is poised for success in a rapidly evolving industry. Our diversified portfolio of utility-scale, renewable energy assets includes 67 solar and wind power generation and battery storage projects in 25 states representing 6,468 MW of capacity across contracted pre-construction, construction, and operational phases.
As an active participant in the rapidly growing renewable energy market, we believe we play a significant role in the replacement cycle for, and decarbonization of, energy infrastructure in the United States. Our primary focus is on utility-scale solar, which is the largest and fastest growing segment within the domestic, onshore renewable energy generation market. Utility-scale solar is expected to add 128 GWdc of capacity at a compound annual growth rate, or CAGR, of approximately 23% in cumulative installations from the beginning of 2021 through the end of 2025 according to Bloomberg New Energy Finance, or BNEF. We believe that our focus on utility scale solar positions us well for continued high growth. See “Our Market Opportunity” for further detail on our position in the industry and the growth trends of the renewable energy market.
We have significantly and consistently expanded our portfolio, increasing our gross MW operating capacity at a CAGR of over 40% from 2012 to 2021, which we believe made us one of the largest and fastest growing renewable energy IPPs in the country over that period. Since January 1, 2019, we have added 3.1 GW to our portfolio of contracted projects. As the market dynamics for renewable energy in the United States continue to improve, we expect continued growth in installed capacity, thereby expanding the opportunity set for our business. Our nimble approach, extensive experience and capabilities, strong network of relationships, and meaningful scale enable us to skillfully navigate a rapidly evolving landscape and enter attractive markets with speed, efficiency, and creative solutions.
1
The charts below summarize the growth in our portfolio of projects in terms of project and capacity additions since 2012:
2
Our management team will own more than % of our common stock immediately following this offering, and, as a result, is strongly aligned with our shareholders and focused on long-term value creation. We employ a hybrid approach to our business that combines the mindset of an owner-operator and a financial investor, and our primary objective is to maximize our net asset value, or NAV, over time. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Net Asset Value” for a description of how we calculate our NAV.) We grow NAV by originating high-quality projects and by actively managing and optimizing our portfolio across the full project lifecycle, from development to construction to financing to ongoing operations. Because we are focused on generating long-term value rather than near-term financial metrics, we focus on securing power purchase agreements, or PPAs—some with terms of over three decades—with high credit quality offtakers. These PPAs deliver consistent revenue streams, which, coupled with operating expenses that generally amount to 15% to 30% of revenues, generate strong, predictable cash flows and drive value creation and NAV growth. Since December 31, 2017, we have increased our NAV by more than $600 million to $1,283 million as of September 30, 2021 and have distributed more than $285 million to our owners as of September 30, 2021. The chart below summarizes the growth in our NAV since January 1, 2017:
Our co-founders are leaders in the renewable energy industry and have successfully navigated an evolving industry landscape over the years. Leveraging this experience, they launched DESRI in 2010 as a new business initiative within the D. E. Shaw group, a leading global investment and technology development firm. Given the origins of our business, we have developed a culture that thrives on analytical rigor and data-driven decision making. Combined with our industry expertise, this approach supports our owner-operator and financial investor mindset, which we believe is a meaningful differentiator from other companies in the renewable energy industry.
Our Approach to Growing NAV
We have developed a unique business model grounded in superior operational and financial execution that is designed to maximize value for our shareholders. Our team of experienced renewable energy professionals is focused on delivering value at every stage of a project’s lifecycle. Our approach is centered around three core principles:
| • | Full-Lifecycle Ownership of High-Quality Assets: We are skilled owner-operators focused on the long-term ownership of high-quality solar and wind power generation and battery storage projects and are committed to growing NAV by optimizing development, construction, financing, and ongoing operations. We bring fully integrated development and operational capabilities and expertise to each of our projects and benefit from the scale of our overall business and our broad network of relationships with developers; utilities; engineering, procurement, and construction, or EPC, firms; capital providers; equipment suppliers; and other key participants in the renewable energy market. We source projects through internal development, joint ventures, and the acquisition of pre-construction or construction-ready projects. We invest in renewable energy projects prior to the operational stage and continue to add value throughout the project lifecycle by actively managing each asset. |
3
| • | Business Model Powered by Capital Efficiency: We have designed a business model that seeks to sustainably grow NAV through a focus on underwriting high-quality projects. By leveraging our deep industry knowledge and investing experience, we have raised more than $16 billion of project equity, debt, and tax equity financing across more than 45 renewable energy projects. We believe that our low cost of capital and deep financing networks are competitive strengths that enable us to capitalize our projects efficiently. We also recycle capital invested in our operational projects, including by selling minority, non-controlling interests following the completion of construction, which enables us to monetize a meaningful portion of the value we create during the pre-construction and construction phases. We repurpose this capital and reinvest it in the development and construction of new projects while maintaining control of, and expanding, our portfolio of long-lived assets. Since our inception, we have not raised any equity capital at the holding company level and have distributed more than $285 million to our owners since December 31, 2017. |
| • | Capital Discipline and an Investor Mindset: Our senior management team, led by our co-founders, approaches new project opportunities and capital allocation decisions with the mindset of an investor because of their background and because they are substantial owners of DESRI. Our management team will own more than % of our common stock immediately following this offering, and, as a result, is strongly aligned with our shareholders and focused on long-term value creation. We are committed to being responsible stewards of shareholder capital and have built a diversified portfolio of projects that has delivered what we believe to be a compelling return on invested capital with an attractive risk-reward profile. |
We expect to continue executing on these three core principles to drive future growth of our business. Using this approach, we believe that we are well-positioned to take advantage of favorable trends in the United States power industry, including the massive replacement cycle of aging and uneconomic electricity infrastructure, the cost competitiveness of renewable energy relative to other fuel sources, and the growing demand by consumers, utilities, and corporations for renewable energy. Furthermore, our team is actively incorporating energy storage into our portfolio given its increasingly important role in the renewable energy sector.
Our Prior Experience in Creating Value for Equityholders
We are a nimble and entrepreneurial team of seasoned professionals with extensive experience in the development, financing, acquisition, construction, and operation of renewable energy projects. Our co-founders have been pioneers in the renewable energy industry for over 15 years and our management team has successfully navigated an evolving landscape shaped by economic, financial, regulatory, and technological circumstances. This experience has enabled us to develop our nuanced approach to active management throughout the project lifecycle with the objective of maximizing the value of our portfolio.
Before launching DESRI, our co-founders held key roles in two historically-important renewable energy companies: First Wind and Deepwater Wind. Under the leadership of both of our co-founders, who were directors of First Wind, the company grew from a single 30 MW wind farm in 2006 into one of the largest privately owned renewable energy companies at the time of its sale in 2015, with an aggregate operating capacity of 521 MW, backlog of 1.1 GW, and a 6.4 GW development platform. Our co-founders also played a substantial role in the founding of Deepwater Wind in 2007 and contributed to its establishment as the leading offshore wind developer in the United States, including by one of our co-founders chairing its board. Deepwater Wind achieved a major milestone for the renewable energy industry by building the first offshore wind farm in the country. Our co-founders leveraged the significant experience gained by building these two industry-leading companies to launch DESRI in 2010.
Our Business Objectives
Our primary business objective is to maximize NAV over time. We drive value throughout the project lifecycle, including through:
| • | the origination of high-quality projects; |
| • | the optimization of project contracts and financings; and |
| • | a sustained focus on value-accretive enhancements throughout the construction and operational phases. |
We believe that the greatest opportunities to increase value on our projects starts at origination and continues through the first two years of operations. We are not a “develop and sell” business like many of our competitors who
4
sell pre-construction projects at or prior to the start of construction. For every project that we originate, we do so with the intention of being a long-term owner. These established projects can continue to be a significant source of new value to our business. This new value can be in many forms. It may be in the form of project specific value, such as a new opportunity to increase production or decrease costs at an existing project. It may also be in the form of portfolio value, such as converting our relationship with an existing project’s offtaker into an opportunity to originate a new project.
Throughout our history, we have forgone opportunities to originate new projects when we believed that, while the project could increase short-term NAV, the project’s risk profile or long-term value proposition was unattractive. We focus on securing PPAs—some with terms of three decades—with high credit quality offtakers. Unlike some of our competitors, we do not operate merchant projects—i.e., projects that sell power without a committed offtake arrangement.
The weighted-average remaining term of the PPAs in our portfolio is approximately 22 years as of September 30, 2021, which we believe to be longer than that of many of our competitors. The durability of PPA revenue streams against market volatility is critical to raising the cost-effective financing necessary to drive down our projects’ cost of capital. A project loan’s interest rate and debt amortization correlate to PPA duration and offtaker credit rating.
During development, we differentiate between projects that have a committed offtake arrangement and those that do not have such arrangements, which we refer to as contracted and uncontracted projects, respectively. Uncontracted projects may never become contracted projects for a variety of reasons. For example, a permit may not be obtained, an offtake opportunity may not materialize, or we may determine that the potential economics of a project are not attractive. Our contracted projects, on the other hand, have a very high success rate of reaching the operational phase. Throughout our history we have never abandoned development on a project with a signed PPA and we have never constructed or operated a project without a committed offtake arrangement.
Our Projects
Our portfolio is composed of 6,468 MW of contracted renewable energy projects located in the United States with geographic, resource, technology, and counterparty diversification, as of September 30, 2021. Our current portfolio includes 67 projects across 25 states, and we have executed PPAs with more than 40 counterparties. The portfolio is comprised of 3,924 MW of operational and construction projects and 2,544 MW of contracted pre-construction projects.
5
The following map provides an overview of our current operational, construction, and contracted pre-construction projects:
Substantially all of the PPA counterparties for our current projects with signed PPAs are investment-grade entities, which collectively have a capacity-weighted average rating of A and A3 based on Standard & Poor’s and Moody’s credit ratings, respectively. The weighted-average remaining term of the PPAs in our portfolio is approximately 22 years as of September 30, 2021.
The following charts provide an overview of the characteristics of our current portfolio of operational, construction, and contracted pre-construction projects with PPAs by contract duration remaining, PPA escalation status, and counterparty credit rating, in each case calculated based on gross MW capacity.
In addition, we have a robust uncontracted development pipeline made up of over 11 GW of renewable power generation projects and over 1 GW of energy storage projects. Each of these projects is owned by DESRI—or subject to a binding agreement for DESRI to acquire the project—and has an application filed for an interconnection agreement (or a signed agreement), or control of applicable land rights, or both.
Originally, our business model focused on the ownership of projects through long-term investment funds. Members of our management team made investments in each of these funds on the same terms as external investors and our business’s operations, infrastructure, and philosophy were developed around these projects, which we still manage. After 2014, we shifted to developing and building projects on our balance sheet and, as part of this strategy, brought minority investors into the projects after, or shortly before, they had become operational. We call these post-operational investors
6
“AssetCo investors” and refer to the funds in which they invest in as the “AssetCo funds.” Similar to their investments in our legacy funds, members of our management team made investments in each of the AssetCo funds on the same terms as the initial AssetCo investors in the fund. In general, third-party investors in our projects fall into the following categories:
| • | AssetCo funds: In 2014, our business model shifted from the management of third-party capital to the direct ownership of renewable energy projects. Since that time, we typically own all, or nearly all, of the equity in our projects prior to the completion of construction (excluding tax equity interests and, in some cases, developer co-investments). As we approach the completion of construction, we typically sell a minority, non-controlling interest in our projects, usually up to 49.9% of our equity interests in the project, at a cost of capital that we believe is attractive, to the AssetCo funds. The AssetCo funds usually have two or three investors that represent most of the capital in the funds, and the AssetCo investors have typically required that our co-founders make a side-by-side investment in the funds with the third-party investors as a condition to their investment. Subject to limited investor rights, we continue to control all aspects of the operations of the applicable projects. The AssetCo funds have been an effective way to recycle capital in our business, and we have raised more than $800 million in the aggregate to date (including undrawn committed funds). |
| • | Tax equity investors: We typically utilize tax equity financing to monetize our projects’ federal tax credits and depreciation deductions. The tax equity investors are often large financial institutions, but for some projects, our affiliates, members of our management team, and other individuals have served as the tax equity investors. We expect that our affiliates may continue to opportunistically serve as tax equity investors on some of our future projects to help manage our tax liability. We have the option to repurchase tax equity investors’ interests in the projects, typically five to eight years after the project’s commercial operation date, or COD. |
| • | Developer co-investments: When we acquire a pre-construction project, we sometimes provide the project’s initial, third-party developer, joint venture partner, or one of their respective affiliates with the right to acquire or retain a minority interest (usually 5% to 15%) in the project. We believe that these co-investments provide strong alignment between us and the third-party developer or joint venture partner throughout the project’s lifecycle. |
| • | Legacy funds: Originally, our business model focused on launching and managing long-term investment funds that would own our projects. These funds currently include 13 projects with an aggregate net operating capacity of approximately 235 MW. We continue to serve as the manager of these investment funds and typically earn a fixed management fee and variable performance fee. We stopped actively pursuing this strategy in 2014 and shifted our focus to the direct ownership of renewable energy projects. In our capacity as manager of these funds, we continue to actively focus on investment returns and improving NAV of the projects within the funds. |
Our Net Asset Value
Our strategy is to identify, acquire, develop, construct, and operate renewable energy projects with the goal of creating and growing long-term value over the useful life of a project. Consistent with the nature of other long-lived infrastructure assets, many of the drivers of a project’s multi-year cash flows are fixed early in its lifecycle, including PPA pricing and term, and debt financing cost and amount. We believe shareholder value is created by focusing on the aggregate cash flows over the life of a project rather than during any individual year. Consequently, our management team utilizes net asset value—which represents a project’s total expected value over the course of its useful life, discounted to the measurement date—as the primary metric for investment decisions and for gauging the success of our business strategy. Our operating income in 2019 and 2020 was $19.9 million and $16.8 million, respectively. Primarily due to unrealized losses on derivative financial instruments, our net loss was $159.9 million and $278.1 million in 2019 and 2020, respectively. We believe that unrealized mark-to-market adjustments to the fair value of our derivative assets and liabilities, which have no cash impact, do not affect the economic value of our equity, as unrealized losses on interest rate derivatives are economically offset by unrealized gains on the underlying assets and/or debt. However, under U.S. GAAP, the unrealized gains and losses on the interest rate derivatives are recognized, while assets and debt are not adjusted for the corresponding effect of offsetting unrealized gains and losses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Metrics—Book Value and Derivative Considerations” for further details on our interest rate derivatives.
We believe our focus on NAV and its growth is the best way to maximize value for our shareholders. While we monitor traditional income statement and cash flows metrics, NAV growth and preservation lies at the core of all of
7
our investment decisions. NAV accounts for the economic growth that has occurred with capital deployed and value created, which can occur well before the assets start generating revenue, thereby providing meaningful visibility into our growth and future cash flows. NAV also accounts for the significant value of construction and pre-construction projects, even if they have yet to generate operational revenue. See “Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Metrics—Net Asset Value” for further detail on why we believe NAV most meaningfully reflects the value of our portfolio and on our methodology in calculating NAV.
| | | As of September 30, 2021 | ||||||||||
(in millions, other than Gross MW Capacity and Net MW Capacity) | | | Total | | | Operational and Construction | | | Contracted Pre- Construction | | | Corporate and Other |
Gross asset value | | | $5,487 | | | $4,866 | | | $296 | | | $325 |
Tax equity financing | | | (323) | | | (323) | | | — | | | — |
Project non-recourse debt(1) | | | (2,597) | | | (2,477) | | | (12) | | | (108) |
Equity interests owned by co-investors(2) | | | (1,083) | | | (1,032) | | | (51) | | | — |
Subordinated non-recourse debt(1) | | | (367) | | | (367) | | | — | | | — |
Corporate debt(1) | | | (20) | | | — | | | — | | | (20) |
Cash(3) | | | 186 | | | 118 | | | — | | | 68 |
Net Asset Value | | | $1,283 | | | $785 | | | $233 | | | $265 |
Gross MW Capacity | | | | | | | | | ||||
Net MW Capacity | | | | | | | | | ||||
| (1) | Debt balances, including project non-recourse debt, subordinated non-recourse debt, and corporate debt, reduce NAV by the amount of their respective carrying values. Such balances are not discounted and reflect the outstanding principal balance for the instrument at each respective measurement date. Substantially all of our debt is fully pre-payable without penalty. The balances exclude U.S. GAAP adjustments related to (i) deferred financing costs and (ii) unrealized gains / (losses) on derivative instruments associated with the projects, hedging interest rate risk. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Metrics—Book Value and Derivative Considerations” for further discussion of our derivative instruments. |
| (2) | Equity interests owned by co-investors reduce NAV by the portion that is attributable to project ownership interests not owned by us. |
| (3) | Reflects the cash balance as of the measurement date. |
Our Market Opportunity
The renewable energy market represents one of the largest growth opportunities in the United States energy sector. Driven primarily by an ongoing replacement cycle of retiring coal and nuclear plants, solar and wind projects have undergone substantial growth over the past decade, providing 11% of total U.S. electricity generation in 2020 compared to 2% in 2010, according to the U.S. Energy Information Administration, or the EIA. Per the EIA, the United States had 166 GW of installed solar and wind electricity generation capacity as of 2020. This growth is expected to continue. According to BNEF, 114 GW of solar and wind were installed in the United States over the past five years and another 188 GW are projected to be installed over the next five years; which would more than double the installed solar and wind electricity generation capacity over the five-year period (reflective of solar capacity on MWdc basis). This new capacity represents the total addressable market, or TAM, for our business over the next several years.
Our primary focus is utility-scale solar, which is the largest and fastest growing opportunity within onshore renewable energy industry, based on 2021 to 2030 capacity installation projections from BNEF. Key growth trends include continuation of the replacement cycle, increasing economic competitiveness of renewables, growing corporate and investor support for renewable energy, technological advances such as the advent of large-scale battery storage, and increased demand driven by widespread electrification. While the energy replacement cycle has been and will continue to be an important driver of renewable energy growth, the falling cost of utility-scale solar energy means that solar projects are highly competitive within the spot power market. Furthermore, increasing adoption of batteries for energy storage is expected to unlock tremendous potential by helping mitigate the historical constraints on intermittent resources such as solar and wind, thereby increasing the opportunity set for our business. Battery storage also has the potential of adding another revenue stream to a project—whether capacity, merchant power, or ancillary revenues—that is incremental to the solar power revenues earned. We expect that these trends will continue driving high growth of our market and creating a significant market opportunity for our business.
8
Overview of the U.S. Renewable Energy Industry
Historically, the majority of power generation in the United States has been sourced from fossil fuels; however, the contribution of solar and wind power has increased over time, particularly over the past two decades. According to data from the EIA, in 2020, solar and wind generation accounted for 166 GW of total installed capacity, a significant increase from 3 GW in 2000.
Over the last 10 years, an ongoing replacement cycle of aging power plants, increasing economic competitiveness, decreasing costs, and technological advances have led to a significant increase in solar and wind contributions to U.S. power generation. Utility-scale solar, in particular, has been a key driver of this trend. According to BNEF, over 48 GWdc of utility-scale solar installations were added to the grid from 2015 to 2020, representing a 35% CAGR in cumulative installations from the beginning of 2015 through the end of 2020.
While demand for electricity in the United States saw limited growth in recent years, the continuation of the replacement cycle has led to renewable energy capturing an increasing market share of existing electricity demand. We expect that, in the future, widespread electrification of the economy will lead to increased demand, a substantial portion of which will be supplied by renewable energy. Indeed, a 2018 analysis by the National Renewable Energy Laboratory, or NREL, estimated that, relative to a reference case of little change in electrification, widespread electrification in the United States would lead to an increase of more than 20% in U.S. electricity consumption by 2050. The accelerated adoption of electric vehicles is expected to be a driver in the increase in power demand, with BNEF forecasting electric vehicles sales to reach 28% and 58% of global passenger vehicles in 2030 and 2050, respectively, up from 3% in 2020.
Utility-Scale Solar Growth
We believe that our focus on, and expertise in developing, utility-scale solar projects positions us to continue actively contributing to the growth of the renewable energy sector. Utility-scale solar is growing faster than any other onshore U.S. renewable generation source and is already one of the largest contributors to new generation in the United States. According to the EIA, 39% of the planned U.S. utility-scale generation capacity additions in 2021 are expected to be solar. The size of the opportunity set is substantial; BNEF forecasts that 213 GWdc of utility-scale solar, versus 91 GW of onshore wind, will be built in the United States from 2021 to 2030. 2020 was a record-year for utility-scale solar additions per BNEF, with an estimated 13.6 GWdc of new build, outpacing the 3.3 GWdc of new residential solar installations and 1.7 GWdc of C&I solar additions. BNEF predicts that the United States will continue to set new records for utility-scale solar additions in each of the next five years, adding over 20 GWdc per year through 2025. As a result, BNEF expects that total installed utility-scale solar capacity will increase from about 59 GWdc as of 2020 to over 270 GWdc by 2030. As a business with a diversified utility-scale asset base underpinned by utility-scale solar, we are well-positioned to benefit from continued high growth in this sector, creating an attractive investment opportunity.
9
Key Growth Drivers
Growth in the renewable energy industry is driven by a variety of factors that affect both the supply and demand for renewable power. Key factors include:
| • | The replacement cycle for aging U.S. power plants; |
| • | Economic competitiveness of solar and wind resources with fossil generation; |
| • | Growing corporate and investor support for decarbonization of energy; |
| • | Battery storage increasing the viability of solar and wind as forms of baseload generation; and |
| • | Widespread electrification, including of equipment, transportation, and infrastructure that has historically been powered by fossil fuels. |
We have been on the forefront of adapting to the evolving renewables landscape throughout our history, and, as opportunities move across markets, our geographically diversified asset base and experience with attuning business practices to changing opportunities allow us to be early movers in the highest-growth markets at any given time. Across our diversified portfolio of contracted projects in 25 U.S. states, we have already established a strong presence in key growth markets such as Illinois, Michigan, Virginia, and Wisconsin, among others. In the third quarter of 2021, we signed our first co-located battery storage and solar PPA for a project in New Mexico with 300 MW of generation capacity and 150 MW of storage capacity and started construction on the project.
While federal policy such as investment tax credits can play a significant role in particular growth cycles, we do not believe federal policy is a fundamental driver of the market. For additional information regarding federal policy, see “Business—Energy Regulatory Matters.”
Our Business and Growth Strategy
Our business is focused on long-term value creation and growing our NAV as opposed to short-term profits. We seek to achieve this by sourcing opportunities to originate and own high-quality projects that generate stable cash flows over multiple decades. We have successfully executed on this model since the inception of our business and intend to continue doing so through the following growth strategies:
Identify and add new, economically attractive projects to our portfolio.
We continuously evaluate opportunities to add to our portfolio of high-quality renewable energy projects. We proactively source our projects through multiple channels, including through our internal development team, joint ventures, existing relationships with offtakers, acquisitions, expansion of existing projects, and opportunistic investments. The vast majority of our recent projects were originated by our internal development team or our joint ventures, but the mix for project origination changes with market dynamics. Between January 1, 2019 and
10
September 30, 2021, we signed or acquired more than 35 PPAs totaling approximately 3.1 GW. As of September 30, 2021, we have 10 contracted projects under construction representing 1.5 GW, nine of which signed a PPA while controlled by DESRI. Of the 18 contracted pre-construction projects in our development pipeline, all but one signed a PPA while controlled by DESRI.
We are committed to expanding our strong market share in established markets in the West and Southwest U.S. while capitalizing on the significant growth in less developed markets, such as the Midwest and Mid-Atlantic regions. We are also actively pursuing energy storage opportunities given their increasingly important role in renewable energy power generation. In particular, the developments in battery technology have the potential to expand our TAM, as battery storage projects represent an additional market opportunity, which has the potential of adding another revenue stream to the projects in our portfolio, and more generally by increasing the amount of solar and wind projects that can be built.
Convert non-operational contracted projects into operational assets at a high success rate and substantially increase the value of our existing portfolio by optimizing a project throughout its lifecycle.
Through our project optimization, improvement, and advancement efforts, we have established a track record of converting non-operational contracted projects into operational assets at a high success rate. We intend to pursue opportunities to improve value, including by optimizing the development, construction, financing, and operations of each project. For example, we believe that through our relationships with industry-leading equipment vendors, we are able to efficiently and cost-effectively source high-quality panels and other key equipment components. Our in-house design and procurement team collaborates with our development and financing team to optimize design and improve the value of each project. Our internal engineering expertise, our relationships with vendors in design and procurement, and our access to capital have enabled us to cost-effectively and efficiently bring projects from the pre-construction stage into the operational stage.
After a project commences operations, we continue to actively pursue value enhancement through refinancings, expense optimization, and growth of ancillary revenue, as well as seek opportunities for repowering, battery optimization, and capacity expansions at existing sites. We have built a talented asset management team that seeks to optimize our projects post-COD. We have completed more than 20 refinancings of project debt since 2016, which has allowed us to accrete substantial value to our equity and generate more than $235 million of distributions from the recapitalizations. We have also executed more than 17 economically favorable O&M amendments since 2017. These optimization efforts, along with others, allow us to increase our NAV through our ongoing and active approach to asset management.
Efficiently redeploy capital into new renewable energy investments.
We historically have been able to fund, and intend to continue to fund, our new projects by reinvesting operating cash flow and monetizing equity investments in our operational assets via sales of minority interests in those assets to third party investors as well as by borrowing under our debt facilities. This practice allows us to grow the holding company without dilution. Since our founding, we have never raised holding company equity capital. Since December 31, 2017, we have increased our NAV by more than $600 million to $1,283 million as of September 30, 2021 and have distributed more than $285 million to owners as of September 30, 2021. For the past decade we have used internally generated cash to help fund our growth, including operating free cash flow, refinancing of more mature projects, and sales of non-controlling interests in projects to third-party co-investors. By recycling capital from our existing projects, we are able to efficiently redeploy our capital to not only fund the future growth of new renewable energy project investments, but also to fund the continued expansion of our team and business infrastructure, all of which are instrumental to our long-term, sustainable growth.
Our Competitive Strengths
We believe that we are well-positioned to continue executing our strategy based on the following competitive strengths:
A unique, hybrid approach as an owner-operator and financial investor.
We have created a differentiated and resilient business model that is grounded in our commitment to owning high-quality, long-lived, contracted assets. We think like an owner-operator as well as a financial investor, and our top priority is long-term value creation for our shareholders. Our senior management team has decades of experience
11
as financial investors, and due to the origin of our business as part of the D. E. Shaw group, we have developed a culture that thrives on analytical rigor and data-driven decision making. We have a disciplined investment approach, which includes de-risking our portfolio while maintaining optionality for the future, and optimizing our cost of capital. The decisions that we make during the pre-construction and construction phases are intended to maximize value throughout a project’s lifecycle. We are committed to building and owning long-lived infrastructure assets and prioritize long-term value creation over short-term profits. Examples of this include our willingness to delay the start of construction of a project if we believe that doing so will improve NAV or lower risk by reducing costs or achieving better energy production. Another example is our strong preference for longer PPA duration, which provides good visibility on cash flow consistency—typically in exchange for a lower contracted price—and allows us to secure more attractive financing terms. Once a project is operational, we continue to seek opportunities to increase value. We actively pursue refinancings in order to decrease interest expense, which typically accounts for the largest portion of a project’s expenses during operations. We also implement various production enhancing measures—for example, vegetation management through solar grazing—which may not have a material impact on an individual or on an annual basis, but in aggregate, have the potential to meaningfully increase long-term value.
Efficient use of capital for growth.
We have worked to optimize the capital structure for projects with project non-recourse debt, tax equity, subordinated non-recourse financing, and minority stake monetization to significantly reduce our cost of capital and need for holding company equity contributions. In fact, we have grown our NAV each year since acquiring our first project without raising external holding company equity. We believe that our financing expertise, longstanding industry relationships, and strong financial position—including our PPAs—have enabled us, and will continue to enable us, to source tax equity financing and low-cost, long-duration, non-recourse project finance debt to fund the construction and operation of our projects. With interest rates continuing to be at historic lows, we consider the current market for non-recourse, project finance bank debt to be highly attractive. Since January 1, 2019, we have averaged approximately LIBOR +130 bps for new project financings and have also economically hedged our interest rate exposure for a period of more than 25 years. See “Description of Certain Financing Arrangements” for additional information about our financing arrangements.
Financing expertise supports winning competitive PPAs and projects.
We take a sophisticated and proactive approach to project financing, which is grounded in the extensive experience of our senior management team. We believe that our strong relationships with financial institutions provide us with a competitive edge to continue developing, acquiring, financing, and refinancing projects on attractive terms. Our ability to structure innovative, customized financing arrangements at a low cost of capital provides us with an advantage in bidding for competitive PPAs from offtakers or acquiring new projects. On a typical project, we utilize a combination of debt and tax equity financing to fund construction. During construction, the capital structure of an average project is comprised of approximately 80% project non-recourse debt in the form of construction loans and bridge loans. Upon the achievement of commercial operation, we generally expect to (i) receive proceeds from tax equity investors to repay the applicable project's bridge loans and (ii) convert project non-recourse debt in the form of construction loans to project non-recourse debt in the form of a term loan. At commercial operation, the capital structure of an average project is comprised of approximately 45% to 50% project non-recourse debt, approximately 40% tax equity funding and approximately 10% to 15% cash equity financing. We have leveraged our deep industry knowledge and relationships to raise over $16 billion of project equity, debt, and tax equity financing for DESRI across more than 45 renewable energy projects as of September 30, 2021. We actively pursue refinancing opportunities in order to reduce these costs and have completed more than 20 refinancings of project debt since 2016, which has allowed us to accrete substantial value to our equity and generate more than $235 million of distributions from the recapitalizations. We also work to diversify our portfolio’s debt financing maturity dates, in order to allow us to efficiently manage refinancings and mitigate market risks. Finally, in 2019 and 2020 we completed our “safe harbor” initiative, which involved the purchase of approximately $130 million in solar modules and tracking equipment and 45 transformers, allowing us to preserve approximately $2 billion in future investment tax credit benefit on more than 5.5 GW of projects, providing us a competitive advantage in future origination, de-risking our project development, and further solidifying a future pipeline of accretive projects.
Best-in-class team with deep expertise across the platform and strong alignment with shareholders.
Our people are one of our greatest assets. Our team is comprised of more than members, who are among the most seasoned professionals in the renewable energy industry, including our co-founders, who have worked together for more than 15 years and have first-hand experience in building a broad range of energy businesses.
12
Our culture is nimble and entrepreneurial, and our ability to adapt quickly to a rapidly evolving market differentiates us from traditional utility companies. We have dedicated teams with domain expertise in areas such as development, origination, EPC, acquisitions, operations, accounting, risk management, and project management. Our Hyderabad office has a team of over 60 professionals who are involved with many facets of our projects and provide cost-efficient expertise in numerous areas, including accounting, engineering, construction financing, and financial modeling. This fully integrated, collaborative approach has allowed us to successfully bring 39 renewable energy projects to commercial operation since our inception and through a variety of market conditions. We intend to continue to strategically grow and develop our team to support the future expansion of our business.
Our management team will own more than % of our common stock immediately following this offering, and, as a result, is strongly aligned with our shareholders and is focused on long-term value creation.
Scale and strong relationships with suppliers translate to favorable terms.
Our scale in procurement and our strong, longstanding relationships with our suppliers are a competitive advantage and enable us to secure industry-leading equipment efficiently and cost-effectively. As of September 30, 2021, we have more than 1.5 GW of solar projects and 150 MW battery storage projects in construction. We are the largest customer of Swinerton, a leading solar EPC firm in the United States, and have contracted 16 projects with them since we were founded. We are also a top customer of LONGi and Nextracker and have established relationships with a number of other important suppliers, including Jinko, First Solar, and Array Technologies.
High-quality, diversified asset base able to withstand market disruptions.
We actively manage the risk profile of our assets, and our current portfolio is strategically assembled to benefit from geographic, resource, technological, and counterparty diversification to withstand market disruptions and to maximize cash flow predictability over the long term. Our projects are located in 25 states throughout the continental United States and Hawaii, which mitigates the effect that adverse regional resource conditions or state-level regulations could have on the cash flows of a more geographically concentrated project portfolio. Furthermore, the equipment used in our portfolio is sourced from a mix of various high-quality suppliers, which we believe helps mitigate the potential adverse effects that design flaws, supplier financial distress, or other similar issues could have on a project portfolio with more significant technological concentration.
We finance projects individually or in small groups with project non-recourse debt, de-levering the project through progressive amortization of the outstanding debt over time. The amortization typically extends over the duration of the PPA, plus an additional two to three years, which allows for risk management and cash flow stability. Finally, we have entered into PPAs with over 40 creditworthy counterparties, which mitigates the cash flow risk associated with any one counterparty. We have developed a number of rewarding relationships with counterparties, some of which have grown to include multiple contracted projects. For example, we have five contracted projects with the Sacramento Municipal Utility District, four with DTE Electric Co., and three with Wabash Valley Power Association.
Environmental, Social, and Governance
As a pure-play, renewable energy IPP, our business inherently supports the decarbonization of electric power generation in the United States. DESRI’s renewable energy projects supply sustainable, reliable, and affordable power to millions of customers in the U.S., and we are committed to serving a variety of communities where we operate. Our diversified portfolio consists of 67 utility-scale solar and wind power generation and battery storage projects in 25 states, and 6,468 MW of capacity across contracted pre-construction, construction, and operational phases. In 2020, our operational projects generated approximately 4,600 gross GWh, enough to support the annual electricity needs of over 590,000 homes. This represents over 3.2 million metric tons of carbon dioxide emissions avoided, which is the equivalent of more than 700,000 passenger cars taken off the roads for the year.
Environmental, social, and governance, or ESG, principles play an important role in DESRI’s business. We intend to demonstrate our accountability to our shareholders by voluntarily reporting certain ESG factors that are recommended by the Sustainability Accounting Standards Board for our industry, such as total capacity of completed solar energy systems. We will also evaluate aligning our internal sustainability goals with certain United Nations Sustainable Development Goals.
13
Recent Developments-Preliminary Full Year 2021 Results
The following preliminary consolidated financial information for the fiscal year ended December 31, 2021 is based upon our estimates and subject to completion of our financial closing procedures. Moreover, this data has been prepared solely on the basis of currently available information. This information should be read in conjunction with our audited consolidated financial statements and related notes, our unaudited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for prior periods included elsewhere in this prospectus. Our independent registered public accounting firm, Ernst and Young LLP, has not audited or reviewed, and does not express an opinion with respect to, this data. This summary is not a comprehensive statement of our financial results for this period, and our actual results may differ from these estimates due to the completion of our financial closing procedures and final adjustments and other developments that may arise between the date of this prospectus and the time our final quarterly consolidated financial statements are completed. Our actual results for the fiscal year ended December 31, 2021 will not be available until after the completion of this offering. There can be no assurance that these estimates will be realized, and these estimates are subject to risks and uncertainties, many of which are not within our control.
Based on preliminary financial and operating results for the full year ended December 31, 2021, we expect to report the following:
| • | NAV(1) growth of $ to million |
| • | Portfolio project additions of contracted projects representing MW |
| • | Net income of $ to million |
| • | Operating EBITDA(2) of $ to million |
| • | Capital expenditure additions of $ to million, offset by depreciation of our operational projects of $ to million |
| • | Debt repayments on operational projects of approximately $ million. |
Based on our preliminary internal estimates, during the fiscal year ended December 31, 2021 we added contracted pre-construction projects totaling approximately MW to our portfolio. This resulted in an overall portfolio of MW across projects as of December 31, 2021, as compared to MW across projects as of December 31, 2020. As of December 31, 2021, we have contracted projects under construction representing MW, compared to contracted projects under construction representing MW as of December 31, 2020. During 2021, projects representing MW completed construction, resulting in operational MW across projects as of December 31, 2021, compared to operational MW across projects as of December 31, 2020.
Our preliminary estimated NAV as of December 31, 2021 is expected to be between $ million and $ million, which represents an increase of approximately $ million to $ million compared to NAV as of December 31, 2020. This expected increase is due to .
Our preliminary estimated Operating EBITDA for the year ended December 31, 2021 is expected to be between $ million and $ million, which represents an increase of approximately $ million to $ million compared to Operating EBITDA for the year ended December 31, 2020. This expected increase is due to .
| (1) | Net Asset Value is a non-GAAP measure. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding this non-GAAP financial measure. |
| (2) | Operating EBITDA is a non-GAAP measure. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding this non-GAAP financial measure. |
14
The following table sets forth a reconciliation of estimated net income (loss) to estimated Operating EBITDA for the period indicated:
| | | Year Ended December 31, | | | Year Ended December 31, 2021 (unaudited) | |||||||
| | | 2019 | | | 2020 | | | Low | | | High | |
| | | (in millions) | ||||||||||
Net Income (Loss) | | | (159.9) | | | (278.1) | | | | | ||
Depreciation and amortization | | | 63.8 | | | 61.1 | | | | | ||
Interest expense | | | 71.9 | | | 69.3 | | | | | ||
(Provision for) / benefit from income taxes | | | 2.3 | | | 1.1 | | | | | ||
Net change in unrealized (gains) losses on derivative financial instruments(1) | | | 141.3 | | | 216.1 | | | | | ||
Net realized (gains) losses on interest rate derivatives(2) | | | 5.6 | | | 17.2 | | | | | ||
Non-recurring (income) expenses(3) | | | (49.1) | | | — | | | | | ||
Operating EBITDA(4) | | | 75.9 | | | 86.5 | | | | | ||
| (1) | We believe it is useful for investors to understand, as a supplement to traditional measures of operating results, the results of our operations without regard to fluctuations in the market value of such derivative assets or liabilities or non-recurring revenues and expenses that do not represent our core business. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Metrics—Book Value and Derivative Considerations” above for further details on how management assesses the overall economic impact of these unrealized gains/losses on the results of our operations and net asset value of our portfolio and why we believe effects of such unrealized mark-to-market adjustments on certain interest rate derivatives do not represent our portfolio’s or our core operating performance. |
| (2) | Represents primarily net payments made during the period on our interest rate swaps incurred in connection with our financing arrangements. Most of our non-recourse financing agreements are structured as variable rate debts coupled with fixed-to-floating interest rate swaps required by the financing counterparties. Together with interest expense on such debts, net realized gains / losses on the interest rate swaps represent the overall fixed interest cost of our financing arrangements. We believe this adjustment is useful for investors in understanding the overall financing costs associated with our financing arrangements and our ability to service debt. |
| (3) | Represents (i) $11mm in non-recurring 2019 construction service revenues from the 2018 sale of 100% of our interest in a project, and (ii) certain casualty losses and associated insurance proceeds in the net amounts of $38mm income in 2019 and $4.2mm expense in 2021. |
| (4) | Based on co-investor ownership in our projects, this amount reflects the share of operating EBITDA belonging to our shareholders. Please see “Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Metrics—Operating EBITDA” for a further description of minority interests owned by our third-party, co-investors. |
Our preliminary estimated net income for the year ended December 31, 2021 is expected to be between $ million and $ million, which represents an increase of approximately $ million to $ million compared to net loss for the year ended December 31, 2020. This increase was due to .
Our preliminary estimated property, plant and equipment, net, is expected to be between $ million and $ million as of December 31, 2021, which represents an increase of approximately $ million to $ million compared to December 31, 2020. This expected increase is due to .
During 2021, we have continued to optimize the capital structure for individual projects with project non-recourse debt, tax equity, subordinated non-recourse financing, and the sale of minority interests, maintaining our low cost of capital. For the year ended December 31, 2021, we secured tax equity funding commitments and project non-recourse financing commitments of approximately $ million and $ million, respectively.
Additionally, we have continued our capital recycling efforts during 2021 through sales to minority interests and refinancings. For the year ended December 31, 2021, we received proceeds of approximately $ million from the sales of minority interests and approximately $ million of incremental debt borrowings from refinancing activities.
15
Recent global supply chain disruptions, specifically module supply delays, have continued in 4Q 2021 driven by a number of factors, including import delays, the COVID-19 pandemic and labor shortages (see “Risk Factors—Risks Related to Development and Construction of our Renewable Energy Projects”). We proactively manage our construction schedules to maximize NAV from projects and will delay the start of construction of a project, or slow down projects in construction, if we believe that doing so will improve NAV. We have implemented a number of measures in 2021 to ensure we are best positioned to mitigate and minimize impact of these supply chain disruptions on our business, and financial and operational results:
| • | We have incorporated the expected impact of higher equipment prices and labor costs in the calculations of our NAVs for construction and contracted pre-construction projects; |
| • | We have modified the actual or anticipated construction start dates for some projects to take into account the availability of equipment, especially as it relates to modules, for such projects and to maximize NAV and minimize project financial risk; |
| • | In certain cases, we have worked with PPA or BTA counterparties to (i) obtain a delay in the target start date of operations and/or (ii) increase the PPA or BTA price to account for the higher costs to build. We have found many PPA and BTA counterparties to be receptive and constructive as the want the renewable power project to be built; and |
| • | As we are one of top customers for several of our suppliers, we have worked closely with them to ensure that we receive a preferred status in the future delivery schedule. |
We plan to continue to actively manage our supply chain and supply relationships to minimize the impact of such shortages and disruptions to our business, financial condition, and results of operations.
The estimates presented above have been prepared by, and are the responsibility of, management. The preliminary results presented reflect management’s estimates based solely upon information available to us as of the date of this prospectus and are not a comprehensive statement of our financial results as of and for the year ended December 31, 2021. We currently expect that our final results will be consistent with the estimates set forth above, but such estimates are preliminary and our final results could differ from these estimates due to the completion of our financial closing procedures, final adjustments and other developments that may arise between now and the time such audited consolidated financial statements for the year ended December, 31 2021 are issued. For example, during the course of the preparation of the respective financial statements and related notes, additional items that would require adjustments to be made to the preliminary estimated financial information presented above may be identified. There can be no assurance that these estimates will be realized, and estimates are subject to risks and uncertainties, many of which are not within our control. See the sections titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding these risks and uncertainties, including other factors that could cause our preliminary estimates to differ from the actual financial results that we will report for the year ended December 31, 2021.
Risk Factor Summary
Investing in our common stock involves a high degree of risk. Before making an investment decision, you should carefully consider all of the information contained in this prospectus and, in particular, the information set forth in the section entitled “Risk Factors.” Some of the more significant risks include the following:
| • | We face competition from traditional and renewable energy companies in developing renewable energy projects. |
| • | Our offtakers and other counterparties could become unwilling or unable to fulfill or renew their contractual obligations to us or they may otherwise terminate their agreements with us. |
| • | Attractive PPA terms may become unavailable, which would adversely affect our business and growth. |
| • | If our projects fail to meet particular development, operational, or performance benchmarks, our offtakers or other counterparties may have the right to terminate the applicable PPAs, interconnection agreements, or any related letters of commitment, require us to pay damages, or reduce the amount of energy such projects sell. |
16
| • | The growth of our business depends upon our ability to continue to source and convert our non-operational projects into operational projects. |
| • | We depend upon the adequate and timely supply of solar modules. |
| • | Projects under development may not be developed, financed, or constructed, or we may not enter into agreements with offtakers, on attractive terms, or at all. |
| • | Our suppliers may not perform existing obligations or be available or able to perform future obligations, which could have a material adverse effect on our business. We have taken on tasks previously performed for us by third-parties in part to mitigate this risk and such efforts may adversely affect us. |
| • | We may be adversely affected by supply shortages and price increases. |
| • | Project construction activities may not be successful and may not commence or proceed as scheduled, which could increase our costs and impair our ability to recover our investments. |
| • | Energy production and revenues from our solar and wind projects depend heavily on suitable meteorological and environmental conditions and our ability to accurately predict meteorological conditions. Climate change may have the effect of changing meteorological patterns at our projects which could have a material adverse effect on our business prospects, NAV, financial condition, results of operations, and ability to make cash distributions to our investors. |
| • | We and any third parties with which we do business may be subject to cyber-attacks, network disruptions, and other information systems breaches, as well as acts of terrorism or war that could have a material adverse effect on our business, NAV, financial condition, and results of operations, as well as result in significant physical damage to our renewable energy projects. |
| • | Our calculation of NAV is based on valuation estimates and numerous assumptions that may not prove accurate or complete, and investors should therefore not place undue reliance on such metric. |
| • | Lower prices for other energy sources could render solar and wind projects uncompetitive or obsolete, could force us to accept lower prices when securing future PPAs or replacing existing PPAs due to a counterparty default, or could result in lower than expected market pricing during the operation of our existing projects after the completion of their PPA term. |
| • | Our ability to effectively operate our business could be impaired if we fail to attract and retain key personnel. |
| • | Our projects are highly regulated and may be adversely affected by legislative or regulatory changes or a failure to comply with applicable regulations. |
| • | Our directors, executive officers, and principal stockholders will continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control. |
Stock Repurchase
In connection with this offering, an affiliate of the D. E. Shaw group and stockholder of the Company, D. E. Shaw GW Investment Holdings, L.L.C., entered into stock repurchase agreements with certain of our other stockholders pursuant to which D. E. Shaw GW Investment Holdings, L.L.C. has agreed to purchase an aggregate of shares of our common stock from such stockholders, which is equal to the number of shares being offered by D. E. Shaw GW Investment Holdings, L.L.C. in this offering, at the initial public offering price less the underwriting discounts and commissions, or the Stock Repurchase. Closing of the Stock Repurchase is conditioned on, and is expected to occur shortly after, the completion of this offering and is subject to other customary closing conditions.
Summary of Reorganization Transactions
DESRI Inc., a Delaware corporation, was formed on August 25, 2021 and is the issuer of the common stock offered by this prospectus. Prior to this offering, our business operations have been conducted through DESRI Holdings, L.P. and its direct and indirect subsidiaries. Following this offering and the Reorganization Transactions, DESRI Inc. will be treated as a corporation for U.S. federal income tax purposes and our business operations will become taxable at DESRI Inc. at the corporate tax rate.
17
We will effect a series of transactions, or collectively, the Reorganization Transactions, in which DESRI Holdings, L.P. will become a subsidiary of DESRI Inc. and the existing partners of DESRI Holdings, L.P. will exchange their outstanding partnership interests in DESRI Holdings, L.P. for a combination of shares of DESRI Inc. and cash and we will appoint DESRI Inc. as the general partner of DESRI Holdings, L.P.
Following this offering, we will be a holding company under PUHCA with U.S. operating subsidiaries that are regulated by FERC as “public utilities” under the FPA. As a result, the FPA requires us, DESRI Holdings, L.P., our U.S. public utility subsidiaries, and/or purchasers of common stock that are also holding companies, as the case may be, either to (i) obtain prior authorization from FERC to transfer or acquire an amount of our voting securities sufficient to convey direct or indirect control over any of our public utility subsidiaries or (ii) qualify for a blanket authorization granted under or an exemption from FERC’s regulations in respect of transfers of control. To ensure compliance with FPA Section 203 and FERC’s regulations in respect of transfers of control, and consistent with the requirements for blanket authorizations granted thereunder or exemptions therefrom, absent prior authorization by FERC, no holder of our common stock will be permitted to own or control, together with its affiliates (as defined in FERC’s market-based rate regulations) and associate companies, 10% or more directly or indirectly of the voting equity of any of our public utility subsidiaries through ownership or control directly or indirectly of (i) our common stock or other voting securities, (ii) the voting equity of our public utility operating subsidiaries, and (iii) the voting equity of any of our intermediate holding companies through which we indirectly hold interests in our public utility operating subsidiaries (the “Applicable Interests”). Any holder of our common stock, together with their affiliates and associate companies, that acquires in the aggregate 10% or more of Applicable Interests will be prohibited from exercising voting rights with respect to such common stock unless prior authorization from the FERC for acquisition of such Applicable Interests is received.
For additional details, see “Organizational Structure” and “Risk Factors.”
18
The following diagram summarizes our organizational and ownership structure after giving effect to the Reorganization Transactions, including this offering. The chart below assumes no exercise of the underwriters’ option to purchase additional shares of common stock. See “Business—Our Projects—Our Operational and Construction Project Portfolio.”
| * | The AssetCo funds and co-investors own interests in some, but not all, of the balance sheet projects. |
19
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of certain reduced reporting and other requirements that are otherwise generally applicable to public companies. As a result:
| • | we are permitted to include only two years of audited financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure; |
| • | we are not required to engage an auditor to report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act; |
| • | we are permitted to take advantage of extended transition periods for complying with new or revised accounting standards, which allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies; |
| • | we are not required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency,” and “say-on-golden parachutes;” and |
| • | we are not required to comply with certain disclosure requirements related to executive compensation, such as the requirement to disclose the correlation between executive compensation and performance and the requirement to present a comparison of our Chief Executive Officer’s compensation to our median employee compensation. |
We may take advantage of these reduced reporting and other requirements until the last day of our fiscal year following the fifth anniversary of the completion of this offering, or such earlier time that we are no longer an emerging growth company. If certain events occur prior to the end of such five-year period, including if we have more than $1.07 billion in annual gross revenue, issue more than $1.0 billion of non-convertible debt over a three-year period, or are deemed to be a “large accelerated filer,” as defined under the Securities Exchange Act of 1934, as amended, or the Exchange Act, we will cease to be an emerging growth company prior to the end of such five-year period.
We may choose to take advantage of some but not all of these reduced requirements. We have elected to adopt the reduced requirements with respect to our consolidated financial statements and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure. We have also elected to take advantage of the extended transition periods for complying with new or revised accounting standards. These provisions allow an emerging growth company to delay the adoption of accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption is required for private companies. As a result, the information that we provide may not be comparable to the information provided by other public companies. See Note 1 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.
For risks related to our status as an emerging growth company, see “Risk Factors—Risks Related to this Offering and Ownership of our Common Stock—We are an “emerging growth company” and intend to take advantage of the reduced disclosure requirements applicable to emerging growth companies which may make our common stock less attractive to investors.”
Corporate Information
Our principal executive offices are located at 1166 Avenue of the Americas, Ninth Floor, New York, New York 10036, and our telephone number is (212) 478-0000. Our website is located at www.DESRI.com. We expect to make available our periodic reports and other information filed with or furnished to the SEC free of charge through our website as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference herein and does not constitute a part of this prospectus.
20
Issuer
DESRI Inc.
Common stock offered by us
shares (or shares, if the underwriters exercise their option to purchase additional shares of common stock in full).
Common stock offered by the selling stockholders
shares (or shares, if the underwriters exercise their option to purchase additional shares of common stock in full).
Common stock to be outstanding immediately after this offering
shares (or shares, if the underwriters exercise their option to purchase additional shares of common stock in full).
Option to purchase additional shares of common stock
We and the selling stockholders have granted the underwriters an option to purchase up to additional shares of common stock. The underwriters may exercise this option at any time within 30 days from the date of this prospectus. See “Underwriting.”
Use of Proceeds
We expect to receive net proceeds of approximately $ million (or approximately $ million if the underwriters exercise their option to purchase additional shares of common stock in full) from the sale of our common stock by us in this offering assuming an initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated offering expenses and underwriting discounts and commissions payable by us.
We intend to use $ million of the net proceeds from this offering to fund the cash consideration for the contribution by the D. E. Shaw group of its outstanding partnership interests in DESRI Holdings, L.P. to DESRI Inc. as described in “Organizational Structure,” based on the assumed initial public offering price of $ per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus).
We intend to use the remaining $ million of net proceeds, based on the assumed initial public offering price of $ per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus), from this offering for general corporate purposes, including to fund development and construction activities on our projects, working capital, and operating expenses. In addition, we may use proceeds from this offering to opportunistically fund project acquisitions and other strategic opportunities.
We do not have any definitive plans for the allocation of the particular uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. Accordingly, our management will have significant flexibility in applying the net proceeds of this
21
offering. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business, and we may allocate the net proceeds from this offering to the specified uses set forth above or for other general corporate purposes.
We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.
See “Use of Proceeds.”
Voting
Each share of our common stock will entitle its holder to one vote on all matters to be voted on by stockholders generally.
Our co-founders will beneficially own an aggregate of approximately % of our outstanding common stock (or approximately % if the underwriters exercise their option to purchase additional shares of common stock in full). Pursuant to a proxy agreement between our co-founders and the D. E. Shaw group, our co-founders will collectively control the voting rights with respect to the election of directors of approximately % of our outstanding common stock (or approximately % if the underwriters exercise their option to purchase additional shares of common stock in full). Concurrent with this offering, our co-founders will enter into a voting agreement among themselves with respect to the election of our directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. See “Management—Controlled Company Exemption.”
Dividends
While we do not currently intend to pay regular cash dividends on our common stock on an annual or quarterly basis, we may pay special dividends from time to time. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, after taking into account our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant. See “Dividend Policy.”
Registration Rights Agreement
Prior to the completion of this offering, we will enter into a registration rights agreement with certain holders of our common stock. See “Description of Capital Stock—Registration Rights Agreement.”
Reserved Share Program
At our request, an affiliate of , an underwriter in this offering, has reserved for sale, at the initial public offering price, approximately % of the shares offered by this prospectus for sale to some of our directors, investors, business associates, and other persons. If these persons purchase reserved shares it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. See “Underwriting.”
22
Listing
We have applied to list our common stock on under the symbol “DESR.”
Risk Factors
See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our common stock.
Unless otherwise indicated, the share information in this prospectus:
| • | gives effect to the Reorganization Transactions; |
| • | assumes an initial public offering price of $ per share of common stock, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus; |
| • | assumes no exercise by the underwriters of their option to purchase additional shares; |
| • | reflects the issuance of shares of restricted stock pursuant to the DESRI Inc. 2022 Omnibus Incentive Plan we intend to adopt prior to the completion of this offering; and |
| • | does not reflect the issuance of up to additional shares of common stock that are reserved for issuance under the DESRI Inc. 2022 Omnibus Incentive Plan. |
23
The following table presents summary historical consolidated financial information of DESRI Holdings, L.P. and its subsidiaries for the periods and as of the dates indicated, as well as certain pro forma financial data of DESRI Holdings, L.P. and DESRI Inc.
The summary consolidated statements of operations and statements of cash flows data for the years ended December 31, 2020 and December 31, 2019 and the summary consolidated balance sheet data as of December 31, 2020 and December 31, 2019 have been derived from the audited consolidated financial statements of DESRI Holdings, L.P. included elsewhere in this prospectus. The summary condensed consolidated statements of operations and statements of cash flows data for the nine months ended September 30, 2021 and September 30, 2020 and the summary condensed consolidated balance sheet data as of September 30, 2021 have been derived from the unaudited condensed consolidated financial statements of DESRI Holdings, L.P. included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements and, in our opinion, contain all adjustments, consisting of only normal recurring adjustments, necessary for fair presentation of such financial data. Historical results for any prior period are not necessarily indicative of results to be expected in any future period.
Historically, our business has been operated through DESRI Holdings, L.P., together with its subsidiaries. DESRI Inc. was formed for the purpose of this offering and has engaged to date only in activities in contemplation of this offering. Upon the completion of this offering, our business will continue to be conducted through DESRI Holdings, L.P., together with its subsidiaries, and the financial results of DESRI Holdings, L.P. will be consolidated in our financial statements. DESRI Inc. will be a holding company whose sole material asset will be the L.P. Interests in DESRI Holdings, L.P. For more information regarding the organizational transactions and holding company structure, see “Prospectus Summary—Summary of Reorganization Transactions” and “Organizational Structure.”
The unaudited pro forma consolidated balance sheet data as of September 30, 2021 and the unaudited pro forma consolidated statements of operations data for the year ended December 31, 2020 and the nine months ended September 30, 2021 present the consolidated results of operations of DESRI Inc. after giving pro forma effect to adjustments described in the section entitled “Unaudited Pro Forma Consolidated Financial Information.” The unaudited pro forma consolidated financial information is for informational purposes only and do not purport to reflect the results of operations or financial position of DESRI Inc. that would have occurred had DESRI Inc. been in existence or operated as a public company during the periods presented. If this offering and other transactions contemplated herein had occurred in the past, our operating results might have been materially different from those presented in the unaudited pro forma financial statements. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our results of operations or financial position had the described transactions occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date. Future results may vary significantly from the results reflected in the unaudited pro forma consolidated financial information and such information should not be relied on as an indication of our results after the consummation of this offering and the other transactions contemplated by such unaudited pro forma consolidated financial statements.
You should read the summary financial data presented below in conjunction with the information included in the sections entitled “Unaudited Pro Forma Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto included elsewhere in this prospectus.
24
| | | Historical | | | Pro Forma | |||||||||||||
| | | Year Ended December 31, | | | Nine Months Ended September 30, | | | Year Ended December 31, 2020 | | | Nine Months Ended September 30, 2021 | |||||||
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | | | (unaudited) | | | (unaudited) | |
| | | (in thousands) | | | | | ||||||||||||
Consolidated Statements of Operations Data: | | | | | | | | | | | | | ||||||
Revenue | | | $140,630 | | | $148,966 | | | $115,260 | | | $168,866 | | | | | ||
Cost of revenue: | | | | | | | | | | | | | ||||||
Depreciation and amortization | | | 63,806 | | | 61,065 | | | 45,176 | | | 62,488 | | | | | ||
Operating and maintenance | | | 24,234 | | | 29,665 | | | 22,242 | | | 30,631 | | | | | ||
Total cost of revenue | | | 88,040 | | | 90,730 | | | 67,418 | | | 93,119 | | | | | ||
Gross profit | | | 52,590 | | | 58,236 | | | 47,842 | | | 75,747 | | | | | ||
Operating expenses: | | | | | | | | | | | | | ||||||
General and administrative | | | 23,940 | | | 29,192 | | | 21,081 | | | 25,449 | | | | | ||
Project development | | | 8,761 | | | 12,241 | | | 7,561 | | | 14,714 | | | | | ||
Total operating expenses | | | 32,701 | | | 41,433 | | | 28,642 | | | 40,163 | | | | | ||
Operating income / (loss) | | | 19,889 | | | 16,803 | | | 19,200 | | | 35,584 | | | | | ||
Other income / (expense): | | | | | | | ��� | | | | | | ||||||
Net realized and unrealized gains / (losses) on derivative financial instruments | | | (146,863) | | | (235,586) | | | (311,714) | | | 153,996 | | | | | ||
Interest expense | | | (71,915) | | | (69,288) | | | (47,910) | | | (44,507) | | | | | ||
Other income (expense), net | | | 41,294 | | | 10,960 | | | 9,386 | | | 4,826 | | | | | ||
Total other expense | | | (177,484) | | | (293,914) | | | (350,238) | | | 114,315 | | | | | ||
| | | | | | | | | | | | | |||||||
Net Income / (Loss) before income taxes | | | (157,595) | | | (277,111) | | | (331,038) | | | 149,899 | | | | | ||
(Provision for) / benefit from income taxes | | | (2,333) | | | (1,038) | | | (941) | | | (3,036) | | | | | ||
Net Income / (Loss) | | | $(159,928) | | | $(278,149) | | | $(331,979) | | | $146,863 | | | | | ||
Less: Net (income) / loss attributable to redeemable and non-redeemable non-controlling interests | | | 66,945 | | | 203,529 | | | 81,556 | | | 91,468 | | | | | ||
Net income / (loss) attributable to DESRI Holdings, L.P. and Subsidiaries | | | $(92,983) | | | $(74,620) | | | $(250,423) | | | $238,331 | | | | | ||
25
| | | Historical | | | Pro Forma | |||||||
| | | Year Ended December 31, | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, 2021 | ||||
| | | 2019 | | | 2020 | | | 2021 | | | (unaudited) | |
| | | (in thousands) | | | ||||||||
Consolidated Statement of Cash Flow Data: | | | | | | | | | ||||
Net cash provided by (used in) operating activities | | | $20,844 | | | $51,719 | | | $43,054 | | | |
Net cash used in investing activities | | | $(651,625) | | | $(918,346) | | | $(821,730) | | | |
Net cash provided by financing activities | | | $659,773 | | | $918,143 | | | $778,585 | | | |
| | | | | | | | | |||||
Consolidated Balance Sheet Data (at end of period): | | | | | | | | | ||||
Cash and cash equivalents | | | $16,002 | | | $45,611 | | | $25,198 | | | |
Restricted cash and restricted cash equivalents | | | $118,886 | | | $140,793 | | | $161,115 | | | |
Total current assets | | | $202,118 | | | $247,442 | | | $268,258 | | | |
Property, plant and equipment, net | | | $2,208,765 | | | $3,215,566 | | | $4,007,777 | | | |
Total assets | | | $2,865,640 | | | $3,864,886 | | | $4,739,671 | | | |
Current portion of long-term debt, net of unamortized deferred financing costs | | | $37,530 | | | $26,103 | | | $36,861 | | | |
Total current liabilities | | | $146,678 | | | $235,090 | | | $272,537 | | | |
Long-term debt, net of unamortized deferred financing costs | | | $1,759,204 | | | $2,492,897 | | | $2,902,723 | | | |
Total liabilities | | | $2,121,560 | | | $3,180,205 | | | $3,516,513 | | | |
Non-controlling interests | | | $518,577 | | | $601,662 | | | $958,065 | | | |
Members’ equity (deficit) | | | $193,020 | | | $33,202 | | | $218,465 | | | |
Total equity | | | $711,597 | | | $634,864 | | | $1,176,530 | | | |
26
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as all of the risks and uncertainties described below, together with all other information contained in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus, before deciding to invest in our common stock. The occurrence of any of the following risks, as well as any risks or uncertainties not currently known to us or that we currently do not believe to be material, could materially and adversely affect our business, NAV, strategies, prospects, financial condition, results of operations, and cash flows. In such case, the market price of our common stock could decline and you could lose all or part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. See “Special Note Regarding Forward-Looking Statements.”
Risks Related to PPAs and the Origination of our Renewable Energy Projects
Attractive PPA terms may become unavailable, which would adversely affect our business and growth.
Intense competition for PPAs has resulted in downward pressure on PPA pricing for newly contracted projects. Downward pressure on module and construction pricing, as a result of research and development and incrementally improved business practices, also creates downward pressure on PPA pricing for newly contracted projects or for PPAs that are expiring and under review for renewal. If falling PPA pricing results in forecasted project revenue that is insufficient to generate returns higher than our cost of capital or those anticipated to be demanded in the project sale market, our business, NAV, financial condition, and results of operations could be adversely affected. Alternatively, if we execute PPAs with pricing that we assume will be attractive based on expectations of falling module or construction pricing or other cost or revenue expectations that ultimately prove to be inaccurate, or the value of a project is less than expected at the time of execution of the related PPA, our business, NAV, financial condition, and results of operations could be adversely affected, including through the loss of initial commitments and any posted letters of credit. In addition, competition for PPAs and other market factors may result in new market terms for PPAs that may not be favorable to us and could adversely affect the NAV of our projects and, in turn, our ability to obtain sufficient financing and grow our business. For example, the increasing trend of disaggregation of PPAs may result in our projects bearing risks traditionally borne by offtakers, such as basis, curtailment, or responsibility to sell capacity. This trend may alternatively require us to seek new PPA counterparties, which could expose us to risks in new markets or associated with having less creditworthy counterparties. Similarly, our competitors are increasingly willing to accept short duration PPA terms, which may put pressure on us to accept shorter duration PPAs, thereby increasing our exposure to market volatility and inaccuracy in the third-party prediction of energy pricing during the merchant tail period of operations after expiration of the PPA, and also affect our NAV growth.
The cost of other sources of power, such as existing natural gas-fired power plants, has historically been lower than the cost of solar power, and certain types of generation projects, such as natural gas-fired power plants, can deliver power on a firm basis. The inability to compete successfully against other power producers or otherwise enter into PPAs favorable to us would negatively affect our ability to develop and finance our projects, including by increasing our cost of capital, and negatively affect our revenue. In addition, the availability of PPAs depends on utility and corporate energy procurement practices that could evolve and shift allocation of market risks over time, including the risk that utilities seek to acquire projects directly. PPA availability and terms are a function of a number of economic, regulatory, tax, and public policy factors, which are also subject to change. Furthermore, certain of our projects may be scheduled for substantial completion prior to the commencement of a long-term PPA with an offtaker, in which case we would be required to enter into a stub-period PPA for the intervening time period between substantial completion and commencement of the PPA or to sell power on a merchant basis. We may not be able to do either on terms that are commercially attractive or at all.
There may be a change in market dynamics or otherwise that causes a slowing or reversal in the trend of corporate offtakers looking to procure energy from renewable projects. Even if our corporate offtakers remain interested in procuring energy from renewable sources and from projects developed by independent power producers, in some cases they may restrict their procurement to complete purchases of the assets. To participate in such transactions would require us to build, own, and transfer the assets to corporate offtakers. While this may be
27
economic for us in some regions and markets, it is generally not consistent with our core business model, which is to own the high-quality assets we develop over their useful life and sell the energy they produce pursuant to long-term PPAs. Shifts in the market away from such PPAs may have an adverse impact on our growth strategy and may negatively affect our business.
If our projects fail to meet particular development, operational, or performance benchmarks, our offtakers or other counterparties may have the right to terminate the applicable PPAs, interconnection agreements, or any related letters of commitment, require us to pay damages, or reduce the amount of energy such projects sell.
If certain of our projects fail to meet particular development, operational, or performance benchmarks related to, among other things, energy production and project availability, within specified time periods, some of the PPAs and interconnection agreements or related letters of commitment in our portfolio provide, and other PPAs and interconnection agreements or related letters of commitment we may enter into in the future may provide, that such failure constitutes a default or event of default. These provisions may provide the applicable offtakers or other counterparties with rights to, among other things: terminate the applicable PPAs and interconnection agreements or related letters of commitment; require us to pay damages under such PPAs or interconnection agreements; or reduce the amount of energy our projects can sell under such PPAs or interconnection agreements. We cannot guarantee that our renewable energy project development will meet historical or projected rates of development. Our energy production or our projects’ availability could be less than historically has been the case or less than we have projected due to various factors, including unexpected solar or wind conditions, natural disasters, equipment underperformance, operational issues, changes in law, actions taken by third parties, or any other factor described under the headings “—Risks Related to the Development and Construction of our Renewable Energy Projects,” “—Risks Related to the Operation and Management of our Renewable Energy Projects,” and “—General Business Risks.” If our projects fail to meet the applicable development or operational benchmarks, such as minimum production requirements, and our offtakers or other counterparties elect to take any such action against us under our PPAs and interconnection agreements, it could materially and adversely affect the development of our renewable energy projects, our results of operations, and cash flow until we are able to replace the PPA or interconnection agreement on similar terms. Further, the PPAs or interconnection agreements containing such provisions may be terminated, which will include the loss of any posted letters of credit, and, in the event of termination, we may not be able to enter into a replacement PPA or interconnection agreement on favorable terms or at all, which may have an adverse impact on our growth strategy and may negatively affect our business.
We face competition from traditional and renewable energy companies in developing renewable energy projects.
The solar and wind energy industries are highly competitive. Companies seeking to develop and originate projects face challenges from competition driven by the rapid deployment of new capital into a broad array of environmental, social, and governance focused ventures. In addition to developers, IPPs, unregulated utility affiliates, renewable energy companies, and pension and private equity funds, we also compete with traditional energy producers and incumbent utilities, which may also be our customers, that supply energy to our potential offtakers under highly regulated rate and tariff structures. We must compete for PPAs, and we rely on a limited number of offtakers under a limited number of long-term PPAs. We may not be able to enter into or renew long-term contracts for the sale of power produced by our projects at prices and on other terms favorable to us. If we cannot offer compelling value to our offtakers, then our business will not grow at our anticipated pace or at all. Traditional utilities generally have, and certain of our other competitors have, substantially greater financial, technical, operational, and other resources than we do. In addition, growing corporate and investor support for renewable energy has increased the amount of money being allocated to developers that compete with us. Such competitors may be able to build and own solar projects at lower costs than us, enabling them to submit bids for PPAs or similar energy purchase agreements at more competitive and appealing terms to potential customers than ours. Traditional utilities could also offer other value-added products or services that could help them compete with us even if the cost of electricity they offer is higher than ours. Furthermore, our potential offtakers may seek to procure energy through arrangements other than fixed or escalating price PPAs and virtual PPAs. If our competitors are willing to provide energy under such agreements, their offers may be more attractive to potential offtakers. Our competitors may also engage with bank counterparties to secure financial hedging instruments in order to provide an alternate contracted revenue stream and thereby submit more competitive pricing to potential offtakers. Similarly, our competitors may be willing to construct projects without off-take agreements, intending to sell the energy they produce directly into bilateral markets or markets managed by Independent System Operators, or ISOs, both of which may enable them to bid on land, interconnection positions, and other development assets. If we cannot effectively compete in all these areas with
28
traditional utilities, other IPPs, renewable energy companies, and pension and private equity funds active in our industry, our ability to grow our portfolio, NAV, and cash flow will be adversely affected.
Our offtakers and other counterparties could become unwilling or unable to fulfill or renew their contractual obligations to us or they may otherwise terminate their agreements with us.
Once we enter into PPAs or other long-term contracts, we are exposed to the risk that our counterparties will become unwilling or unable to fulfill or renew their contractual obligations and, if they may otherwise terminate their agreements with us, we cannot guarantee that we will enter into replacement agreements on substantially similar terms or at all. Similarly, our credit risk is concentrated among a limited number of offtakers and the failure of even one of these key counterparties to fulfill its contractual obligations to us could significantly affect our business and financial results. Any or all of our offtakers may fail to fulfill or renew their obligations to us under their PPAs or otherwise, including as a result of the occurrence of any of the following factors:
| • | Events beyond our control or the control of an offtaker that may temporarily or permanently excuse the offtaker from its obligation to accept and pay for delivery of energy generated by a project. These events could include a system emergency, transmission failure or curtailment, adverse weather conditions, changes in law, changes in permitting requirements or conditions, or labor disputes. |
| • | The ability of our offtakers to fulfill their contractual obligations to us depends on their creditworthiness. Due to the long-term nature of our PPAs, we are exposed to the credit risk of our offtakers over an extended period of time. These counterparties could become subject to insolvency or liquidation proceedings or otherwise suffer a deterioration of their creditworthiness, including when they have not yet paid for energy delivered, any of which could result in a default under their agreements with us, and an insolvency or liquidation of these counterparties could result in the termination of applicable agreements. |
| • | A default or failure by us to satisfy minimum energy delivery requirements or availability levels under our PPAs could result in a requirement that we make damages payments to the applicable offtaker, could trigger a right of the offtaker to terminate the applicable PPA, or could trigger certain downward adjustments of the amount of energy sold under the applicable PPA. |
| • | The ability of our offtakers to extend, renew, or replace their existing PPAs with us depends on a number of factors beyond our control, including: whether the offtaker has a continued need for energy or capacity at the time of expiration, which could be affected by, among other things, the presence or absence of governmental incentives or mandates, prevailing market prices, and the availability of other energy sources; the satisfactory performance of our delivery obligations under such PPAs; the regulatory environment applicable to our offtakers at the time; and macroeconomic factors present at the time, such as population, business trends, and related energy demand. |
If our offtakers are unwilling or unable to fulfill or renew their contractual obligations to us, or if they otherwise terminate such agreements prior to their expiration, we may not be able to recover contractual payments and commitments due to us. Since the number of counterparties that purchase wholesale bulk energy is limited, we may be unable to find a new energy purchaser on similar or favorable terms or at all. Any interruption in or termination of payments by our counterparties could adversely affect our ability to pay project lenders and tax equity investors, could cause a default under the applicable project debt and tax equity financing arrangements, and could trigger cross-defaults under our other financing arrangements. In such a case, the cash flows we receive could be adversely affected. In addition, our ability to finance additional projects with PPAs from such counterparties would be adversely affected, undermining our ability to grow our business. The loss of or a reduction in sales to any of our offtakers could have a material adverse effect on our business, NAV, financial condition, and results of operations.
Risks Related to Development and Construction of our Renewable Energy Projects
The growth of our business depends upon our ability to continue to source and convert our non-operational projects into operational projects.
We may not be successful in achieving the operational phase on our contracted pre-construction and construction projects. The completion of renewable energy projects involves numerous risks and uncertainties including the risks set forth elsewhere in this section. These risks and uncertainties may prevent some projects from progressing to construction and operational phases. In addition, for a variety of reasons, we may elect not to proceed with the development or construction of a project currently in our portfolio. Our growth depends on our continued ability to
29
progress projects to the operational phase and our results in the future may not be consistent with our expectations or historical results. If we are not successful in doing so, we will not continue to grow our NAV, portfolio, and cash flows.
We depend upon the adequate and timely supply of solar modules.
Solar modules are a vital component to solar projects. The construction and financing of a project can be contingent on a specific engineering design optimized for the project site, therefore it can be costly or time consuming, if possible at all, to switch to a different module supplier once a project is in an advanced development stage. Solar modules come from limited sources of supply, and therefore a disruption with any one manufacturer, supplier or other participant in our supply chain would have an adverse effect on our ability to complete construction on our solar projects on time, or at all. As a result, we are subject to the risk of shortages, increased prices, and long lead times in their supply. We have in the past experienced, and may in the future experience, module shortages, and the availability and cost of these components would be difficult to predict. For example, the supply of solar modules may be disrupted due to equipment breakdowns, tariffs or import restrictions, COVID-19, delivery delays, labor strikes or shortages, natural disasters, component or material shortages, cost increases, acquisitions, insolvency, changes in legal or regulatory requirements, or other similar issues affecting participants in our supply chain. Such disruptions and other factors may cause suppliers, including suppliers not directly affected by such disruptions, to raise prices or renegotiate existing arrangements in a manner that is adverse to us. For example, as described in more detail below, while we do not currently expect that the Uyghur Forced Labor Prevention Act will directly affect our supplies, since we do not believe that our suppliers source materials from Xinjiang for the products they sell to us, other renewable energy companies’ attempts to change suppliers in response to this law, withhold release orders, or other policy developments could result in shortages, delays, and/or price increases that could disrupt our own supply chain or cause our suppliers to renegotiate existing arrangements with us or fail to perform on such obligations.
In particular, due in part to the COVID-19 pandemic, import restrictions, tariffs, global supply chain disruptions, and other factors, we have experienced challenges in obtaining the timely delivery of solar modules. These challenges may result in increased delivery lead times, delays in the construction schedules, and increased costs. To the extent these issues continue, and we are unable to mitigate their effects, our ability to grow our business would be adversely affected. If we are unable to complete the construction of projects on time, such projects’ PPAs or other contractual arrangements may be terminated or renegotiated. Similar issues may also arise with respect to other project components.
We may be negatively affected by tariffs or trade relations between the United States and other countries.
The United States has, from time to time, levied tariffs on goods imported from other countries. We may be negatively affected by tariffs or adverse developments in trade relations between the United States and other countries, including any actions that may be taken by other countries in retaliation to U.S. trade policies. Tariffs, the adoption and expansion of trade restrictions, the occurrence or exacerbation of a trade war, or other governmental action related to tariffs, trade agreements, or related policies could adversely affect our supply chain, access to equipment, costs, and ability to economically serve certain markets. For example, the Section 201 tariffs introduced by the United States in January 2018 significantly increased our cost of importing modules produced in foreign countries, which we use to construct our projects. In 2021, the U.S. extension of tariffs on imported solar cells and modules negatively affected our profitability and rendered inaccurate our estimates for the costs of certain construction and pre-construction projects. We have no control over the trade policies of the United States or other countries and we may be negatively affected by additional restrictive economic measures, such as tariffs or other changes to U.S. trade policies. Additional tariffs and extensions of existing tariffs are currently being considered by the U.S. government. Any further cost increases or decreases in availability caused by trade policies could slow our growth and cause our financial results and performance metrics to suffer.
Projects under development may not be developed, financed, or constructed, or we may not enter into agreements with offtakers, on attractive terms, or at all.
The development of renewable energy projects involves numerous risks. We may be required to spend significant sums for land and interconnection rights, preliminary engineering, permitting, module, tracking, and other equipment, legal services, and other expenses before we can determine whether a project is feasible, economically attractive, or capable of being built. Success in developing a particular project is contingent upon, among other things:
30
| • | obtaining financeable land rights, including land rights for the project site that allow for eventual construction and operation without undue burden, cost, or interruption; |
| • | entering into financeable arrangements for the sale of the electrical output, and, in certain cases, capacity, ancillary services, and renewable energy attributes generated by the project; |
| • | obtaining economic interconnection positions with ISOs, regional transmission organizations, and other regulated utilities; |
| • | accurately estimating, and where possible mitigating, long-term costs arising from potential transmission grid congestion, limited transmission capacity, and grid reliability constraints, which may contribute to significant interconnection upgrade costs that could render certain of our projects uneconomic; |
| • | providing required payment and performance security for the development of the project, such as through the provision of letters of credit, including to address increasing security requirements; |
| • | accurately estimating our costs and revenues over the life of the project years before its construction and operation, while taking into consideration the possibility that markets may shift during that time; |
| • | receipt from governmental agencies of required environmental, land-use, and construction and operation permits and approvals, which are governed by statutes that may change between issuance and construction; |
| • | avoidance or mitigation of impacts to protected or endangered species or habitats, migratory birds, wetlands or other jurisdictional water resources, and/or archaeological, historical, or cultural resources; |
| • | securing necessary rights-of-way for access, as well as water rights for project construction and operation; |
| • | securing appropriate title coverage, including coverage for mineral rights and mechanics’ liens; |
| • | negotiation of development agreements, public benefit agreements, and other agreements to compensate local governments for project impacts; |
| • | negotiation of state and local tax abatement and incentive agreements, whenever applicable; |
| • | obtaining financing, including debt, equity, and tax equity financing; |
| • | negotiation of satisfactory EPC agreements, including agreements with third-party EPC providers; and |
| • | completing construction on budget and on time. |
In addition, our projects depend upon obtaining timely and economic interconnection to electric transmission lines owned and operated by regulated utilities to deliver the electricity we generate. A failure or delay in the operation or development of these interconnection or transmission facilities could result in our losing revenues because such a failure or delay could limit the amount of power our operational projects deliver or delay the completion of our construction projects. The costs of such interconnection and transmission facilities for which our projects may be responsible can also be uncertain and subject to change, including after a project commences operation.
If we fail to complete the development of a renewable energy project or fail to meet other contract terms, we may be subject to forfeiture of significant deposits under PPAs or interconnection agreements or termination of such agreements, incur significant liquidated damages, penalties, and/or other obligations under other project-related agreements, and may not be able to recover our investment in the project. If we are unable to complete the development of a renewable energy project, we may impair some or all of the capitalized investments we have made relating to the project, which would have an adverse impact on our NAV and cash flows in the period in which the loss is recognized.
Our suppliers may not perform existing obligations or be available or able to perform future obligations, which could have a material adverse effect on our business. We have taken on tasks previously performed for us by third-parties in part to mitigate this risk and such efforts may adversely affect us.
We often rely on a small number of suppliers, such as solar panel and tracker suppliers, to provide equipment, technology, and other services required to construct and operate our projects. A number of factors, including the credit quality of our suppliers and import and export restrictions, may affect their ability to perform under our supply agreements. Not all of our equipment suppliers are investment grade entities, and we cannot guarantee that any of our suppliers will sufficiently honor the terms of our contracts in every situation. If any of these suppliers cannot, or
31
does not, perform under its agreements with us, we may need to seek alternative suppliers. Alternative suppliers, products, and services may not perform similarly, and replacement agreements may not be available on favorable terms or at all. Using alternative suppliers may result in higher costs and/or inability to meet our project schedules or to provide equipment of the same quality as that provided by our existing suppliers. We may be required to make significant capital contributions to remove, replace, or redesign equipment that cannot be supported or maintained by replacement suppliers. The failure of any supplier to fulfill its contractual obligations to us could have a material adverse effect on our business, NAV, financial condition, and results of operations. Further, the acquisition of a supplier by one of our competitors or its affiliates could also limit our access to equipment, technology, and other services or negatively affect our existing business relationships, which would have a material adverse effect on our business.
We also have performed in the past, and may decide in the future to perform, work that would have previously been performed by a counterparty under such contract, such as engineering, design, procurement, or construction. The scope of work that we choose to perform ourselves may not benefit from research and development efforts or innovation that counterparties would have otherwise applied to such work had they performed that work on our projects under contract. We cannot guarantee that the performance of such projects will meet our expected parameters or compete with the performance of our competitors who benefit from any such research and development, which would have a material adverse effect on our business.
Union activity could result in increased costs or delays in the development or construction of our projects, which could adversely affect our results of operations.
The employees of many of the contractors and subcontractors we engage are represented by labor unions or are subject to collective bargaining arrangements that may require the payment of wages that are higher than we expect or that may not be commensurate with the value of specialized labor being provided, which can materially increase the costs of constructing a project. In addition, certain of our suppliers also have unionized employees or contractors, including those responsible for transporting the materials we require for our renewable energy projects. Strikes, work stoppages or other labor disputes of our suppliers’ or their contractors’ workforces could result in slowdowns or cost increases in the development or construction of our projects.
Increased unionization in the renewable energy industry, including as a result of the enactment and implementation of federal, state or local statutes, ordinances, rules or regulations requiring unionization or the payment of prevailing wages in connection with the development, construction, or operation of renewable energy projects and the ancillary services required to develop, build, and operate renewable energy projects, could increase our costs of development and construction or cause us to otherwise forego pursuing a project, which could materially and adversely affect our NAV, results of operations and financial condition.
We may be adversely affected by supply shortages and price increases.
Our and our suppliers’ supply chain and operations could be subject to events beyond our control, such as earthquakes, wildfires, flooding, hurricanes, tsunamis, typhoons, volcanic eruptions, droughts, tornadoes, the effects of climate change and related extreme weather, public health issues and pandemics, war, terrorism, cyber-attacks, government restrictions, tariffs, or limitations on trade, and geo-political unrest and uncertainties. For example, the COVID-19 pandemic is having an unprecedented impact on the U.S. economy, global supply chains, and on our business. These impacts have caused significant shipping delays and price increases and also raised the price of inputs like steel, resulting in a number of our suppliers and EPC contractors raising force majeure claims to excuse the performance of their obligations under our contracts with them.
There have also been periods of industry-wide shortage of key components, including solar panels, in times of rapid industry growth or regulatory change. For example, guidance from the Internal Revenue Service, or the IRS, on the steps required for construction to be deemed to have commenced in time to qualify for federal investment tax credits resulted in significant module and other supply shortages in the market as customers started purchasing supplies in advance of the December 2019 deadline to qualify for a 30% investment tax credit. Changes in federal, state, or local regulations may require new or different system components to satisfy the requirements of such newly effective codes or regulations, which may not be readily available for distribution to us or our suppliers. The manufacturing infrastructure for some of our projects’ components has a long lead time, requires significant capital investment, and relies on the continued availability of key commodity materials, potentially resulting in an inability of manufacturers to meet demand for these components, which, as a result, could negatively affect our ability to
32
complete projects in a timely manner and/or increase our costs. Additionally, many of our component supplies are imported, and any decline in the exchange rate of the U.S. dollar compared to the functional currency of our component suppliers could increase our component prices, in addition to shortages of raw materials and increased commodity and shipping costs, particularly with respect to steel shortages. Any of these shortages, delays, or price changes could limit our growth, cause cancellations, or adversely affect our NAV, cash flows, and result in development delays and increased costs.
Forced labor practices in China and legislation and policies adopted to address such practices may disrupt the global supply of solar panels and affect our business.
Since 2016, U.S. Customs and Border Protection has issued sixteen withhold release orders directed at forced labor in China, including ten directed specifically at activity in the Xinjiang Uyghur Autonomous Region. As a result of these orders, certain products, including solar panels manufactured with polysilicate from Xinjiang, are effectively barred from entering the United States. Despite our due diligence efforts, as well as contractual provisions we put in place that forbid our suppliers from using forced labor or components that were produced using forced labor, we cannot determine with certainty whether our suppliers may violate our contracts or become subject to a withhold release order, which could subject us to legal, reputational, and other risks. If this were to occur, we might have to find alternative suppliers on short notice, resulting in construction delays and disruption and higher costs.
On December 23, 2021, the Uyghur Forced Labor Prevention Act, which effectively prohibits imports of any goods made either wholly or in part in Xinjiang, was signed into law. The law prohibits “the importation of goods made with forced labor” unless U.S. Customs and Border Protection determines, based on “clear and convincing evidence”, that the goods in question were not produced “wholly or in part by forced labor”, and submits a report to the U.S. Congress setting out its findings. While we do not currently expect that this law will directly affect our supplies, since we do not believe that our suppliers source materials from Xinjiang for the products they sell to us, other renewable energy companies’ attempts to shift suppliers in response to this law, withhold release orders, or other policy developments could result in shortages, delays, and/or price increases that could disrupt our own supply chain or cause our suppliers to renegotiate existing arrangements with us or fail to perform on such obligations. Broader policy uncertainty could also reduce Chinese panel production, affecting supplies and/or prices for panels, regardless of supplier. While we have developed multiple supply sources in a variety of countries, we could still be adversely affected by increases in our costs, negative publicity related to the industry, or other adverse consequences to our business.
Project construction activities may not be successful and may not commence or proceed as scheduled, which could increase our costs and impair our ability to recover our investments.
The construction of renewable energy projects involves numerous risks. Success in constructing a particular project is contingent upon or may be affected by, among other things:
| • | timely implementation and satisfactory completion of construction; |
| • | obtaining and maintaining required governmental permits and approvals, including appeals of approvals obtained; |
| • | permit and litigation challenges from project stakeholders, including local residents, environmental organizations, labor organizations, tribes, and others who may oppose the project; |
| • | grants of injunctive relief to stop or prevent construction of a project in connection with any permit or litigation challenges; |
| • | delivery of modules on-budget and on-time; |
| • | discovery of unknown impacts to protected or endangered species or habitats, migratory birds, wetlands or other jurisdictional water resources, and/or cultural resources at project sites; |
| • | discovery of unknown title defects, unknown environmental conditions, unforeseen engineering problems, construction delays, contract performance shortfalls, and work stoppages; |
| • | labor, equipment, and material supply shortages, failures, or disruptions; |
| • | increases to labor costs beyond our expectation upon entering into construction agreements as a result of enhanced local or national requirements regarding the use of union labor on-site; |
| • | insolvency or financial distress on the part of our service providers, contractors, or suppliers; |
33
| • | cost overruns and change orders; |
| • | cost or schedule impacts arising from changes in federal, state, or local land-use or regulatory policies; |
| • | changes in electric utility procurement practices; |
| • | project delays that could adversely affect our ability to secure or maintain interconnection rights; |
| • | unfavorable tax treatment or adverse changes to tax policy; |
| • | adverse environmental and geological or weather conditions, including water shortages and climate change, which may in some cases force work stoppages due to heat or fire risks; |
| • | force majeure and other events outside of our control; and |
| • | change in laws affecting the project. |
If we fail to complete the construction of a renewable energy project, fail to meet one or more agreed target construction milestone dates, or fail to meet other contract terms, we may be subject to forfeiture of significant deposits under PPAs or interconnection agreements (which will also lead to a default of our loan agreement and foreclosure on the project) or termination of such agreements, incur significant liquidated damages, penalties, and/or other obligations under other project-related agreements, and may not be able to recover our investment in the project. If we are unable to complete the construction of a renewable energy project, we may impair some or all of the capitalized investments we have made relating to the project, which would have an adverse impact on our cash flows or NAV in the period in which the loss is recognized.
Risks Related to the Operation and Management of our Renewable Energy Projects
Operation and maintenance of renewable energy projects involve significant risks that could result in unplanned outages, reduced output, interconnection or termination issues, or other adverse consequences.
There are risks associated with the operation of our projects. These risks include:
| • | greater or earlier than expected degradation, or in some cases failure, of solar panels, inverters, turbines, gear boxes, blades, and other equipment; |
| • | catastrophic events, such as fires, earthquakes, severe weather, tornadoes, ice or hail storms or other meteorological conditions, landslides, and other similar events beyond our control, which could severely damage or destroy a project, reduce its energy output, result in property damage, personal injury, or loss of life, or increase the cost of insurance even if these impacts are suffered by other projects as is often seen following events like high-volume wildfire and hurricane seasons; |
| • | technical performance below projected levels, including the failure of solar panels, inverters, wind turbines, gear boxes, blades, and other equipment to produce energy as expected, whether due to incorrect measures of performance provided by equipment suppliers, improper operation and maintenance, or other reasons; |
| • | increases in the cost of operating the projects, including costs relating to labor, equipment, unforeseen or changing site conditions, insurance, regulatory compliance, and taxes; |
| • | the exercise by PPA counterparties of options present in certain PPAs to purchase the underlying project for a fixed price that may be lower than the fair market value or our NAV attributable to such project at such time; |
| • | storm water or other site challenges; |
| • | the discovery of unknown impacts to protected or endangered species or habitats, migratory birds, wetlands or other jurisdictional water resources, and/or cultural resources at project sites; |
| • | the inability to sell power following the termination of offtake contracts; |
| • | errors, breaches, failures, or other forms of unauthorized conduct or malfeasance on the part of operators, contractors, or other service providers; |
| • | cyber-attacks targeted at our projects as a way of attacking the broader grid or the ISO, or a failure by us or our operators to comply with NERC cyber-security regulations aimed at protecting the grid from such attacks; |
34
| • | design or manufacturing defects or failures, including defects or failures that are not covered by warranties or insurance; |
| • | loss of interconnection capacity, and in turn the ability to deliver power under our PPAs, due to grid or system outages or curtailments beyond our or our counterparties’ control; |
| • | insolvency or financial distress on the part of any of our service providers, contractors, or suppliers, or a default by any such counterparty for any other reason under its warranties or other obligations to us; |
| • | breaches by us and certain events, including force majeure events, under certain PPAs and other contracts that may give rise to a right of the applicable counterparty to terminate such contract; |
| • | unforeseen levels of price volatility that may result in financial loss when a project sells energy at a different location on the grid than where it is delivered under its PPA; |
| • | failure to obtain or comply with permits and other regulatory consents and the inability to renew or replace permits or consents that expire or are terminated; |
| • | the inability to operate within limitations that may be imposed by current or future governmental permits and consents; |
| • | changes in law, particularly in land use, environmental, or other regulatory requirements; |
| • | the inability to extend our initial land leases on the same terms for the full useful life of the project; |
| • | disputes with federal agencies, state agencies, or other public or private owners of land on which our projects are located, or adjacent landowners; |
| • | changes in tax, environmental, health and safety, land use, labor, trade, or other laws, including changes in related governmental permit requirements; |
| • | government or utility exercise of eminent domain power or similar events; |
| • | existence of liens, encumbrances, or other imperfections in title affecting real estate interests; and |
| • | failure to obtain or maintain insurance or failure of our insurance to fully compensate us for repairs, theft or vandalism, and other actual losses. |
These and other factors could have adverse consequences on our solar or wind projects. For example, these factors could require us to shut down or reduce the output of such projects, degrade equipment, reduce the useful life of the project, and materially increase O&M and other costs. Unanticipated capital expenditures associated with maintaining or repairing our projects would reduce profitability. Congestion, emergencies, maintenance, outages, overloads, requests by other parties for transmission service, including on our facilities, actions or omissions by other projects with which we share facilities, and certain other events, including events beyond our control, could partially or completely curtail generation and delivery of energy by our projects and could lead to our customers terminating their PPAs with us. Any termination of a project’s interconnection or transmission arrangements or non-compliance by an interconnection provider, the owner or operator of shared facilities, or another third party with its obligations under an interconnection, shared facilities, or transmission arrangement may delay or prevent our projects from delivering energy to our offtakers. If the interconnection, shared facilities, or transmission arrangement for a project is terminated, we may not be able to replace it on similar terms to the existing arrangement, or at all, or we may experience significant delays or costs in connection with such replacement. In addition, replacement and spare parts for solar panels, wind turbines, and other key pieces of equipment may be difficult or costly to acquire or may be unavailable.
Any of the risks described above could significantly decrease or eliminate the revenues of a project, significantly increase its operating costs, cause us to default under our financing agreements, or give rise to damages or penalties owed by us to an offtaker, another contractual counterparty, a governmental authority, or another third party, or cause defaults under related contracts or permits. Any of these events could have a material adverse effect on our business, NAV, financial condition, and results of operations.
35
Our projects may not perform as we expect, and the protection afforded by warranties provided by our counterparties may be limited by the ability or willingness of a counterparty to satisfy its warranty obligations or by the expiration of applicable time or liability limits, which could reduce or void the warranty protections, or the warranties may be insufficient to compensate our losses.
The ability of our projects to perform as forecasted is subject to risks inherent in energy projects, including inadequate equipment performance, system failures and outages, and the performance of the third parties that provide O&M services for our projects. In addition, because we often rely on a small number of suppliers to provide equipment, we have limited options to obtain alternate supplies, if needed. Although we expect to benefit from various warranties, including construction, product quality, and performance warranties, provided by our counterparties in connection with the construction of our projects, the purchase of equipment necessary to operate our projects, and certain other matters, our counterparties may default on their warranty obligations, including because such counterparties may become insolvent or cease operations. Even if a counterparty fulfills its obligations, many of our warranties do not cover reimbursement for lost revenue and we cannot guarantee any warranties will be sufficient to compensate us for all of our losses. Further, there are limitations in most warranties, including limits on liability. Many warranties have exclusions rendering them inapplicable if, for example, the owner does not follow the manufacturer’s operating instructions. We may disagree with a counterparty about whether a particular product defect, performance shortfall, or other similar matter is covered by a warranty, in whole or in part, as well as the manner in which any such matter should be resolved. As a result, enforcing any such warranty may be costly or impossible. Such costs may include significant out-of-pocket and internal expenses, some or all of which may not be recovered. Additionally, in order to lower costs and improve project performance we frequently hire in-house expertise to perform construction and procurement scope internally that would have otherwise been performed or provided by a contractor and subject to its warranty. Such adjustments in scope may result in less of the total value of the project being covered by counterparty warranties and may increase the likelihood that we bear full liability for costs associated with any equipment failures or underperformance. The failure of some or all of our projects to perform according to our expectations and limitations to our warranty coverage could have a material adverse effect on our business, NAV, financial condition, and results of operations.
Our projects are subject to curtailment and other production restriction risks.
Our projects may be subject to curtailment or other production restrictions under various circumstances. Under the terms of certain of our PPAs, our projects’ delivery of electricity is subject to curtailment or other restrictions, including by our offtakers, regional transmission organizations, or ISOs, for various reasons, including for system maintenance or reliability and stability purposes, over-generation, or due to transmission limitations, emergencies, or force majeure circumstances. Additionally, under the terms of certain of our interconnection agreements, our projects may bear the risk of curtailment or other restrictions on production resulting from the regional transmission organization, balancing authority, transmission owner, or ISO for similar reasons. Finally, our project operators may themselves elect to curtail or restrict production from our projects, within the terms of the applicable O&M agreements, interconnection agreements, and PPAs, for safety or maintenance reasons. As the penetration of renewable energy increases in transmission systems around the country, the risk of congestion leading to curtailment increases, particularly at the times of day and year when our projects are generating the most energy due to common resource availability among us and our competitors. During most of these curtailments or restrictions, we are not compensated. In addition, the determination as to whether compensation for curtailments will be paid is made under contracts which may be subject to differing interpretations or may be breached by counterparties. Any curtailment or restriction could have a material adverse effect on our business, NAV, financial condition, and results of operations.
Energy production and revenues from our solar and wind projects depend heavily on suitable meteorological and environmental conditions and our ability to accurately predict meteorological conditions. Climate change may have the effect of changing meteorological patterns at our projects which could have a material adverse effect on our business prospects, NAV, financial condition, results of operations, and ability to make cash distributions to our investors.
The energy produced and revenue and cash flows generated by a solar or wind project depend on suitable climatic conditions, particularly solar and wind conditions, both of which are beyond our control. Our solar projects require strong, consistent exposure to sunlight to achieve the predicted power generation and weather, geological, or other conditions at our project sites, as well as climatological phenomena not experienced directly at our sites, may prevent adequate amounts of sunlight from reaching some or all of our solar projects. For example, smoke from distant wildfires has historically affected the solar resource available at some of our California solar projects. Also,
36
our wind projects will only operate within certain ranges of wind speed ranges that vary by turbine model and manufacturer, and the wind resource at any given project site may not fall within such specifications.
Furthermore, components of our solar energy systems, such as panels and inverters, and wind projects, such as turbines and blades, could be damaged by severe weather or natural catastrophes, the exposure of our projects to which varies greatly due to the number of diverse regions in which our projects are located, such as snowstorms, ice storms, hailstorms, lightning strikes, tornadoes and derechos, fires, earthquakes, landslides, mudslides, sandstorms, drought, dust-storms, floods, hurricanes, or other inclement weather. In these circumstances, project development, connectivity to the power grid, and the provision of O&M services may be adversely affected. In particular, materials may not be delivered as scheduled and labor may not be available and we may be obligated to bear the expense of repairing the damaged solar and wind energy systems that we own. Such extreme weather conditions or natural catastrophes may also severely affect our operations by greatly reducing energy output from our systems, and in cases of severe damage, to zero, causing a reduction in revenue in addition to increased costs due to damages. Replacement and spare parts for key components may be difficult, costly, or otherwise unavailable to obtain. Moreover, natural disasters may adversely affect the economy, infrastructure, and communities in the regions where we conduct our business and regions and countries where we source our materials.
We base our investment decisions with respect to projects on the findings of solar or wind resource studies as well as remote modelling of solar or wind resources conducted by our own and third-party engineers, all of which are used to generate predictions as to solar or wind resource over future periods, and forecast methodologies used by third-party engineers may change over time. Actual weather, resource and other climatic conditions at a project site may not conform to the findings of these studies, and our projects may not meet anticipated production or transmission levels. Climatic conditions and resource expectations will continue to change over time, and we cannot accurately predict such changes. Further, weather patterns change in scope and magnitude in ways that diverge from historic trends, making it harder to predict the average annual amount of sunlight striking each of our solar project locations or prevailing wind patterns and speeds at our wind projects. Climate change also affects the severity, frequency, and geographical zones of severe weather or natural catastrophes. Our inability to accurately predict availability of solar or wind resources and prepare our equipment and personnel for extreme weather events could adversely affect our profitability and, as a result, harm our business, NAV, financial condition, and results of operations.
General Business Risks
Our calculation of NAV is based on valuation estimates and assumptions that may not prove accurate or complete, and undue reliance should therefore not be placed on such metric by investors.
Our calculation of net asset value is based on valuation estimates and assumptions that may not prove accurate or complete, and as a result the actual net asset value may differ materially from our calculation. Specifically, our calculation of net asset value relies upon the following estimates and assumptions, among others:
| • | The assumption of a discount rate for future net cash flows of each project that varies based on the project’s lifecycle phase. While we believe our assumed discount rates are reasonable, such information is generally not publicly available and the rates we use may not be consistent with those used by others. Additionally, an assumed discount rate might not be appropriate based on interest rates in effect from time to time and industry or company-specific risks associated with these cash flows, and the discount rate we use may change in the future due to the level of inflation, rising or declining interest rates, our cost of capital, and capital structure of our projects, among other things; |
| • | Estimates of the useful life and total production of each asset are based upon reports prepared by independent engineers. The accuracy of these reports depends on the quality of available data, the interpretation of such data and assumptions about specific project equipment made by the independent engineers, which cannot be measured with precision and estimates may vary across engineering firms or over time; |
| • | Estimates of the future construction costs (for contracted pre-construction projects) and expenses per project. While certain expenses are determinable, predictable and/or fixed, other expenses are variable and cannot be predicted with complete certainty; |
| • | To the extent the output of a project is not fully subject to PPA(s), merchant price projections provided by third-party services (currently the ABB Ventyx curve), adjusted for an annual inflation escalation. To the |
37
extent the third-party forecast does not include prices for the full useful life of our projects, estimates of pricing in the later years applying an annual escalator to the merchant price of the last available year in such third-party forecast;
| • | The assumption that once a PPA or other contract is signed that the counterparty will perform pursuant to the terms of the contract, that the contract will not be terminated, and that the contract will receive all necessary regulatory or other approvals. If this assumption is not correct and a contract is terminated or a regulatory approval is not obtained, our NAV may be materially and adversely affected; |
| • | The assumption that all pre-construction and construction projects will become operational. For the reasons described elsewhere in these “Risk Factors” or otherwise, this assumption may not be correct; and |
| • | The assumption that we will buy out tax equity investors within six months after the date of the “partnership flip” (i.e., after the investor either receives its contractual rate of return or after the specified time period, in either case generally expected to occur five to eight years after the project’s commercial operation date) typically for the fair market value of their residual interest in the partnership, and in some cases, the greater of (i) a pre-agreed contractual amount or (ii) the fair market value of their residual interest in the partnership. |
Additional estimates and assumptions are further discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Net Asset Value—Key Inputs and Assumptions.” Using different assumptions and estimates than those described above could result in a net asset value materially different from ours. To illustrate the way in which actual results may change based on differing assumptions and estimates, we present a sensitivity analysis of NAV for the discount rate that was applied and the merchant pricing assumption under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Net Asset Value—NAV Sensitivities.” Furthermore, because other renewable energy companies may define NAV differently, our definition of NAV may not be comparable to a similarly titled measure of other companies, thereby diminishing its utility as a comparative measure.
These estimates and assumptions are inherently uncertain and, although we consider them reasonable as of the date of this prospectus, they are subject to a wide variety of significant business, economic, and competitive risks and uncertainties that could cause actual values to differ materially from the NAV presented herein, including, among others, underperformance of the respective projects, unexpected increases in operating costs, competition from wind and solar market participants and the energy market more broadly, technical innovation of competing products, disadvantageous macroeconomic conditions, unfavorable developments in the regulatory environment, reduction in government incentives. Any of the risks, to the extent they occur, could cause actual NAV to vary significantly and our future NAV may be materially lower than the values presented herein, particularly given that these estimates and assumptions relate to project cash flows up to 35 years following a project commencing commercial operations. As a result of these assumptions and estimates, NAV should not be relied upon as determinative with respect to the actual value of our asset portfolio or of our common stock. To the extent those estimates and assumptions prove to be incorrect or are modified in the future, the price of our common stock and our ability to execute our growth strategy could be materially and adversely affected.
Our business strategy includes growing our portfolio of projects through acquisitions, which involve numerous risks.
Our strategy includes growing our business through acquisitions. Acquisitions involve numerous risks, including exposure to existing and future liabilities and unanticipated post-acquisition costs associated with the pre-acquisition activities by the acquired projects, difficulty in integrating the acquired projects into our business, and, if the projects operate in new markets, the risks of entering markets where we have limited experience. For example, projects may be acquired from parties that have made inaccurate representations, which exposes us to existing and future liabilities.
Upon consummation of the acquisition of a renewable energy project, such acquisition will also be subject to many of the risks set forth elsewhere in this “Risk Factors” section. Additionally, we risk overpaying for such projects (or not making acquisitions on an accretive basis) and failing to retain the counterparties to the PPAs or other commercial agreements in place for such projects. While we will perform due diligence on prospective acquisitions, we may not discover all potential risks, operational issues, or other problems affecting such projects. Future acquisitions might not perform as expected or the returns from such acquisitions might not support the financing utilized to acquire them or maintain them. A failure to achieve the financial returns we expect when we acquire renewable energy projects and assets could have a material adverse effect on our ability to grow our business.
38
Finally, we may not have sufficient availability under our credit facilities or have access to project-level financing, including, in some instances, tax equity financing, on commercially reasonable terms when acquisition opportunities arise. An inability to obtain the required or desired financing could significantly limit our ability to consummate future acquisitions and effectuate our growth strategy. If financing is available, it may be available only on terms that could significantly increase our costs, impose additional or more restrictive covenants, or reduce cash flow.
Our projects depend and will depend on third-party service providers.
We have retained and will in the future retain third-party service providers to perform construction, O&M, and other services related to our projects. Outsourcing these functions involves the risk that third parties may not perform to our standards (including as a result of errors, breaches, failures, or other forms of unauthorized conduct or malfeasance), may not produce results in a timely manner, or may fail to perform at all. Although we have not experienced any significant difficulties with our third-party service providers to date, it is possible that we could experience difficulties in the future, which could: (i) cause us to default on our contractual, financing, regulatory, and other obligations; (ii) adversely affect our ongoing operations; (iii) reduce our capacity to generate power from one or more projects on a temporary or permanent basis; (iv) lead to litigation or arbitration; or (v) expose us to liquidated damages.
If a third-party service provider is terminated or resigns, or if we lose a provider through consolidation, or otherwise, it may be difficult or impossible to locate a suitable replacement. We may have limited access to alternative service providers or experience difficulty finding a replacement on a cost-efficient basis if the service providers on which we generally rely are unable to perform for any reason. Further, as the construction and O&M service industries continue to consolidate, we may experience additional cost pressure from our service providers. We also may not be able or desire to retain third-party service providers on the same terms in the future, and, as a result, we may be forced to take on additional risk, such as cost inflation and other cost increases that would otherwise be covered by third-party providers, and/or responsibilities associated with the construction and the operation and management of our projects. Any of these events could have a material adverse effect on our business, NAV, financial condition, and results of operations.
Lower prices for other energy sources could render solar and wind projects uncompetitive or obsolete, could force us to accept lower prices when securing future PPAs or replacing existing PPAs due to a counterparty default, or could result in lower than expected market pricing during the operation of our existing projects after the completion of their PPA term.
Lower costs for other sources of energy may render solar and wind energy projects and technologies uncompetitive or obsolete. This could force us to accept lower prices when securing PPAs in the future, and may cause our existing PPAs to reflect off-market pricing and incentivize PPA counterparties to seek to terminate or default under our PPAs and, in the case of a default by those PPA counterparties, require us to enter into replacement PPAs at significantly lower prices.
Technological advances in the energy industry may result in lower costs for other sources of energy and our failure to adopt new technologies as they are developed could have a material adverse effect on our business, NAV, financial condition, and results of operations. The level of solar and wind energy demand is also affected by the price and availability of other energy sources, including nuclear, coal, natural gas, and oil, as well as other sources of renewable energy. For example, low natural gas prices have led, in some instances, to increased consumption of natural gas in lieu of other energy sources. To the extent renewable energy, particularly solar and wind energy, becomes less cost-competitive due to reduced government targets and incentives that favor other forms of generation, lower-cost alternatives, or other factors, including development of new sources of energy or technological advancements in existing sources, demand for solar and wind energy and other forms of renewable energy could decrease or be eliminated. Slow growth or a long-term reduction in demand for renewable energy in particular or energy in general could have a material adverse effect on our ability to generate sufficient capital for our projects and grow our business.
Inflation could adversely affect our business and results of operations.
The renewable energy industry has seen long periods of declining costs, which may not continue, or may reverse. Inflation or the absence of cost decreases could adversely affect us by increasing the actual or expected costs of land, raw materials, and labor, and other goods and services needed to operate our business, which in turn may
39
raise our cost of capital and the costs of developing, constructing, and operating a project, making it more difficult to develop and operate our projects. Should cost increases occur, prospective counterparties may also choose to forego or delay signing PPAs or other agreements with us. Significant increases in actual or expected costs may have an adverse impact on our business, NAV, financial condition, and results of operations.
Our ability to effectively operate our business could be impaired if we fail to attract and retain key personnel.
Our ability to operate our business and implement our strategies effectively depends on the efforts of our executive officers and other key employees. Our management team has significant industry experience and would be difficult to replace. These individuals possess development, construction, operational, management, legal, engineering, financial, and administrative skills that are critical to the operation of our business. With the growth of the renewable energy industry, we have seen an increase in the need for experienced personnel with applicable experiences. In addition, the market for personnel with the required industry and technical expertise to succeed in our business is highly competitive, and we may be unable to attract and retain qualified personnel to replace or succeed key employees should the need arise. In order to remain competitive in attracting and retaining such personnel, we may need to increase the compensation of our employees, including new hires, beyond our current expectations. The loss of the services of any of our key employees or the failure to attract or retain other qualified personnel could have a material adverse effect on our business, NAV, financial condition, and results of operations.
We are not able to insure against all potential risks and we may become subject to higher insurance premiums or may not obtain insurance at all.
We are exposed to numerous risks inherent in the operation of renewable energy projects, including equipment failure, manufacturing defects, natural disasters, pandemics, terrorist attacks, cyber-attacks, sabotage, theft, vandalism, and environmental risks. Further, with respect to any projects that are under construction or development, we are, or will be, exposed to risks inherent in the construction and development of these projects. The occurrence of any one of these events may result in us being named as a defendant in lawsuits asserting claims for substantial monetary damages, including those associated with environmental cleanup costs, personal injury, property damage, fines, and penalties.
Some of the risks to which we are exposed are generally not insurable, including risks related to terrorism. Even if the risks are generally insurable, we may not maintain or obtain insurance of the type and amount we desire at reasonable rates or at all, and we may elect to self-insure a portion of our portfolio. The insurance coverage we do obtain may contain large deductibles or insufficient coverage or fail to cover certain risks or potential losses. We often cannot obtain full coverage at economic rates and are instead limited to probable maximum loss coverage subject to commercially reasonable limits. In addition, our insurance policies are subject to annual review by our insurers and may not be renewed on similar or favorable terms, including with respect to coverage, deductibles, or premiums, or at all.
As the renewable energy industry grows, insurance providers may reassess the risks associated with solar and wind projects and we may experience higher insurance costs, including as the result of industry-wide increases in insurance premiums. Industry-wide increases in insurance premiums have recently and may in the future arise as the result of cost spreading efforts from major insurance providers following major natural disasters such as hurricanes or widespread wildfires. Finally, even if we believe that insurance should cover any particular claim, there may be litigation with insurance companies or others regarding the claim, and we may not prevail. The occurrence of any such natural disaster may result in our being named as a defendant in lawsuits asserting claims for substantial monetary damages, including those associated with environmental cleanup costs, personal injury, property damage, fines, and penalties. If a significant accident or event occurs for which we are not fully insured, or if we are unable to obtain or retain a sufficient level of insurance, which could constitute a breach under our PPAs, we may experience a material adverse effect on our business, NAV, financial condition, and results of operations.
We are subject to risks associated with litigation or administrative proceedings that could materially affect us.
We are subject to risks and costs, including potential negative publicity, associated with lawsuits, claims, or administrative proceedings, including lawsuits, claims, or proceedings relating to our business or the, development, construction, or operation of our projects. In addition, we may become subject to legal or administrative proceedings or claims contesting the issuance of a permit or seeking to enjoin the construction or operation of our projects. The result and costs of defending any such proceedings or claims, regardless of the merits and eventual outcome, may
40
be material. Any such proceedings or claims could also materially delay our ability to complete construction of a project in a timely manner or at all or could otherwise materially adversely affect a completed project’s operations. Further, we have little control over whether third-party claims will be brought by one or more third parties, including public and private landowners, offtakers, equipment suppliers, construction firms, labor unions, and O&M and other service providers or their employees or contractors. Defending litigation, delays caused by litigation, and the costs of settling or other unfavorable outcomes, including judgments for monetary damages, injunctions, or denial or revocation of permits, could have a material adverse effect on our business, NAV, financial condition, and results of operations.
We and any third parties with which we do business may be subject to cyber-attacks, network disruptions, and other information systems breaches, as well as acts of terrorism or war that could have a material adverse effect on our business, NAV, financial condition, and results of operations, as well as result in significant physical damage to our renewable energy projects.
Our operations rely on our computer systems, hardware, software, and networks, as well as those of third parties with which we do business, such as O&M and other service providers, to securely process, store, and transmit proprietary, confidential, financial, and other information. We also rely heavily on these information systems to operate our solar and wind projects. Information technology system failures and network disruptions may be caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, human errors in using or accessing relevant systems, or similar events or disruptions. Cyber-attacks, including those targeting information systems or electronic control systems used to operate our energy projects and the facilities of third parties on which our projects rely, could severely disrupt business operations, and result in loss of service to offtakers and significant expense to repair security breaches or system damage. In addition, our costs to adequately counter the risk of cyber-attacks may increase significantly in the future. In recent years, such cyber incidents have become increasingly frequent and sophisticated, targeting or otherwise affecting a wide range of companies. While we have instituted security measures to reduce the likelihood and impact of a cyber-attack or data breach and have back-up systems and disaster recovery plans for other disruptions, these measures, or those of the third parties with which we do business, may be ineffective or inadequate. If these measures fail, valuable information may be lost; our development, construction, O&M, and other operations may be disrupted; we may be unable to fulfill our customer obligations; and our reputation may suffer. As a result of the COVID-19 pandemic, the vast majority of our employees who are capable of performing their functions remotely are telecommuting and may continue to do so for the foreseeable future, which may exacerbate these risks. Such risks may also subject us to litigation, regulatory action and fines, remedial expenses, and financial losses beyond the scope or limits of our insurance coverage. These consequences of a failure of security measures could, individually or in the aggregate, have a material adverse effect on our business, NAV, financial condition, and results of operations.
Terrorists have attacked energy assets such as substations and related infrastructure in the past and may attack them in the future. We cannot guarantee adequate protection from such attacks on our projects and have little or no control over the facilities of third parties on which our projects rely. Attacks on our or our counterparties’ assets could severely damage our projects, disrupt business operations, result in loss of service to offtakers, and require significant time and expense to repair. Additionally, energy-related facilities, such as substations and related infrastructure, are protected by limited security measures, in most cases only perimeter fencing. Our current portfolio, as well as projects we may develop or acquire and the facilities of third parties on which our projects rely, may be targets of burglary, terrorist acts and affected by responses to terrorist acts, each of which could fully or partially disrupt our projects’ ability to produce, transmit, transport, and distribute energy. To the extent such acts constitute force majeure events under our PPAs or interconnection agreements, the applicable offtaker generally may reduce or cease making payments to us and may terminate such PPA or interconnection agreement if such force majeure event continues for a period typically ranging from six to twelve months as specified in the applicable agreement. We are also generally unable to, or do not, obtain insurance coverage to compensate us for losses caused by terrorist or other similar attacks. As a result, any such attack could significantly decrease revenues, result in significant reconstruction or remediation costs, or otherwise disrupt our business operations, any of which could have a material adverse effect on our business, NAV, financial condition, and results of operations.
41
Our business is subject to liabilities and operating restrictions arising from environmental, health, and safety laws, regulations, and permits.
Our projects are subject to various federal, state, and local environmental, health, and safety laws, regulations, guidelines, policies, directives, permits, and other requirements governing or relating to, among other things:
| • | the protection of wildlife, including migratory birds, bats, and threatened and endangered species, such as desert tortoises, or protected species such as eagles, and other protected plants or animals whose presence or movements often cannot be anticipated or controlled; |
| • | water use, and discharges of silt-containing or otherwise polluted waters into nearby wetlands or navigable waters; |
| • | hazardous or toxic substances or wastes and other regulated substances, materials, or chemicals, including those existing on a project site prior to our use of the site or the releases thereof into the environment; |
| • | land use, zoning, building, and transportation laws and requirements, which may mandate conformance with sound levels, radar and communications interference, hazards to aviation or navigation, or other potential nuisances such as the flickering effect, known as shadow flicker, caused when rotating wind turbine blades periodically cast shadows through openings such as the windows of neighboring properties; |
| • | the presence or discovery of archaeological, historical, religious, or cultural artifacts at or near our projects; |
| • | the protection of workers’ health and safety; and |
| • | the proper decommissioning of the site at the end of its useful life. |
In addition, we need construction and operating permits issued under various federal, state, and local environmental laws and regulations to operate our business, see “Business—Environmental Matters—Environmental Regulation.” Those construction and operating permits are obtained and renewed through applications that require considerable investment in technical documentation and analysis, and sometimes require lengthy review periods. Delays in obtaining or renewing such permits, or denial of such permits and renewals, are possible and would have a negative effect on our financial performance and prospects for growth.
If our projects do not comply with such laws, regulations, requirements, or permits, we may be required to pay penalties or fines, curtail or cease operations of the affected projects, make costly modifications to such projects, or seek new or amended permits for our projects. Violations of environmental and other laws, regulations, and permit requirements, including certain violations of laws protecting wetlands, migratory birds, bald and golden eagles, and threatened or endangered species, may also result in criminal sanctions or injunctions. For example, several of our wind projects have needed to obtain or amend federal or state permits following the unpermitted take of certain endangered birds or bats during the operation of the project.
Our projects also carry inherent environmental, health, and safety risks, including the potential for related civil litigation, regulatory compliance, remediation orders, fines, and other penalties. For instance, equipment or machinery at our projects could malfunction or experience other unplanned events that cause spills that exceed permitted levels, resulting in personal injury, fines, or property damage. Environmental, health, and safety, or EHS laws and regulations have generally become more stringent over time, and we expect this trend to continue. We may need to incur significant capital and operating costs to keep our projects in compliance with EHS laws and regulations. If it is not economical to make those expenditures, or if we violate any of these laws and regulations, it may be necessary to retire or suspend operations at our facilities or restrict or modify our operations to obtain or maintain compliance, either of which could have a material adverse effect on our business, NAV, financial condition, and results of operations.
Additionally, we may be held liable for related investigatory and cleanup costs for any property where there has been a release or potential release of a hazardous substance, regardless of whether we knew of or caused the release or potential release, even in the absence of negligence. We could also be liable for other costs, including fines, personal injury, property damage, or damage to natural resources. In addition, some environmental laws place a lien on a contaminated site in favor of the government as security for damages and costs it may incur relating to contamination and cleanup. Contained or uncontained hazardous substances on, under, or near our projects, regardless of whether we own or lease the property, or the inability to remove or otherwise remediate such substances may restrict or eliminate our ability to operate our projects.
42
Our projects are designed specifically for the landscape of each project site and cover a large area. Despite the fact that we conduct studies of project sites prior to construction, problems may arise, such as the discovery of archaeological, historical, or cultural artifacts, threatened or endangered species or their habitat, or hazardous materials at our project sites. Such discoveries could result in the restriction or elimination of our ability to operate our business at a particular project site or, if during construction, could result in delays or termination of construction. Landscape-scale projects and operations may also cause effects to certain landscape views, trails, or traditional cultural activities. Such effects may trigger claims from members of local communities alleging that our projects are infringing upon their legal rights or other claims, which could result in the in the restriction or elimination of our ability to operate our business at any project site.
Violations of environmental and other laws, regulations, and permit requirements, the discovery of archaeological, historical, or cultural artifacts, threatened or endangered species or their habitat, or hazardous materials at our project sites, or adverse effects on public or private lands could also result in negative publicity for us, which could, in turn, limit our ability to develop our solar and wind projects and acquire interests in additional renewable energy projects on favorable terms or at all.
The development, construction, and operation of our projects require governmental approvals and permits, including environmental approvals and permits. Any failure to obtain or maintain in effect necessary permits could adversely affect our business and results of operations.
The development, construction, and operation of renewable energy projects are highly regulated, require various governmental approvals and permits, including environmental approvals and permits, and may be subject to the imposition of related conditions that vary by jurisdiction. In some cases, these approvals and permits require periodic renewal and the terms of a subsequently issued permit may not be consistent with the terms of the permit initially issued. In other cases, these permits may require compliance with terms that can change over time. We cannot predict whether all permits required for a given project will be granted or whether the conditions associated with the permits, as such conditions may change over time, will be achievable. The denial or loss of a permit essential to a project, or the imposition of impractical or burdensome conditions upon renewal or over time, could impair our ability to construct and operate a project or repower or make modifications following construction. In addition, we cannot predict whether seeking the permits will attract significant opposition or whether the permitting process will be lengthened due to complexities, legal claims, or appeals. Delay in the review and permitting process for a project can impair or delay the ability to develop, construct, or operate a project or increase the cost such that the project is no longer profitable for us.
Government regulations providing incentives and subsidies for renewable energy, particularly the current production and investment tax credits, could change at any time and such changes may negatively affect our growth strategy as well as result in lower returns on our projects.
Our strategy to grow our business partly depends on current government policies that promote and support renewable energy and enhance the economic viability of developing, investing in, constructing, owning, and operating renewable energy projects. Renewable energy projects currently benefit from various U.S. federal, state, and local governmental incentives, such as investment tax credits, production tax credits, or PTCs, and Renewable Portfolio Standards, or RPS, programs, accelerated tax depreciation, and other incentives. These policies have had a significant positive effect on the development of renewable energy projects in the U.S. and the renewable energy industry in general. These incentives make the development of renewable energy projects more competitive by providing tax credits and accelerated depreciation for a significant portion of the development costs, decreasing the costs associated with developing such projects, or creating demand for renewable energy assets through RPS programs.
Governmental incentives that promote the development of renewable energy projects could change at any time, and any loss or reduction in any or all of these renewable energy incentives and subsidies may reduce our willingness to pursue or develop certain renewable energy projects due to higher development costs or less attractive financing opportunities. Furthermore, if government incentives or subsidies for other sources of renewable energy are increased relative to those available to utility-scale wind or solar energy, or if utility-scale wind or solar energy projects fail to receive government incentives or subsidies at all, the demand for our projects may be reduced and the pricing terms under our PPAs may become less favorable, which could slow our growth and cause our financial results and NAV to suffer.
43
Additionally, some states with RPS targets have met, or in the near future will meet, their renewable energy targets. If these and other U.S. states do not increase their targets in the near future, demand for additional renewable energy could decrease. To the extent other states and provinces do not adopt RPS targets, programs, or goals, demand for renewable energy could decrease in the future. Any of the foregoing could have a material adverse effect on our business, NAV, financial condition, results of operations, and ability to grow our business.
We have recently added energy storage assets to our portfolio. Such projects may present construction and operational issues and other unforeseen challenges associated with deploying new technology.
The inclusion of energy storage assets in our portfolio will require us to make assumptions regarding their useful life, cost of operations, need for insurance, likelihood of claims against warranties, and other such factors relating to their successful operation. For example, risks associated with the relatively unproven nature of energy storage assets, such as the risk of fire or explosion, increase the level of unpredictability in making assumptions relating to the costs associated with our portfolio. Because we have less experience developing, building, and operating energy storage assets than wind and solar projects, we may be more likely to make assumptions regarding such matters that prove to be incorrect. We may also be unable to develop, construct, or operate such projects successfully or profitably. Failure to accurately estimate such inputs may result in the related energy storage or energy purchase agreements not being attractive, or not being as attractive as anticipated, which could in turn negatively affect our business. Similarly, incorrect assumptions on the nature of costs to operate such assets or the kind or amount of warranty protection such assets are likely to need, may result in our operating agreements for the assets not covering all needed services or alternatively covering more services than is necessary, either of which could, in turn, negatively affect our business.
We may develop or acquire other types of assets.
We may pursue acquisitions or development in areas in which we have limited or no expertise, and, as a result, may not have the technical and other experience, networks, and market knowledge necessary to develop, acquire, or operate such assets successfully, which could expose us to increased operating costs and unforeseen liabilities or risks. Such risks include regulatory and environmental issues associated with entering new sectors of the energy industry and requiring a disproportionate amount of our management’s attention and resources, which could have an adverse effect on our business and place us at a competitive disadvantage relative to more established energy market participants. A failure to successfully integrate any such acquisitions with our then-existing business as a result of unforeseen operational difficulties or otherwise could have a material adverse effect on our business, NAV, financial condition, results of operations, and ability to grow our business.
We act as manager for certain investment funds that hold interests in many of the projects that we operate, and as a result we are subject to risks associated with being an investment adviser.
We are subject to the risks associated with managing and advising certain investment funds that hold interests in our projects. Such risks include our dependence on investors fulfilling their funding commitments, reduction in management fees due to early liquidation of our investment funds, a significant decline in the value of underlying assets, and the failure of our investment funds to realize profits for a considerable period of time, if at all. The illiquid nature of our funds’ assets may also negatively affect their ability to retain sufficient liquidity to satisfy their cash obligations as they become due, including any management fees due to us, and to the extent our investment funds perform poorly, we may be subject to adverse claims from investors, and our reputation may be adversely affected.
As manager of these funds, we are subject to extensive regulation in the United States. The SEC oversees our activities as a registered investment adviser under the Investment Advisers Act of 1940, as amended, or the Investment Advisers Act, and we are subject to certain regulations under the Exchange Act and various other statutes and regulations. Many of the regulatory bodies with jurisdiction over us have regulatory powers dealing with many aspects of financial services, including the authority to grant and, in specific circumstances, cancel permissions to carry on particular businesses and to conduct examinations, investigations and proceedings that may result in fines and other sanctions. A failure to comply with the legal and regulatory obligations imposed by the various regulatory regimes we are subjected to could result in investigations, sanctions, or reputational damage as well as reputational damage or revocation of our registration as an investment adviser.
In addition, under the Investment Advisers Act, each of the management agreements for the funds we manage must provide that it may not be assigned without the consent of the fund. An assignment may occur under the Investment Advisers Act if, among other things, we undergo a change of control. If such an assignment occurs, we cannot be certain that we will be able to obtain the necessary consents.
44
A significant portion of our operations are conducted or supported by our affiliate in India.
Our business relies on more than 60 individuals that are currently employed by the D. E. Shaw group in India. These employees are expected to be transitioned to us within approximately six months following the closing of this offering. This transition may not be successful, in whole or in part, and some or all of the applicable employees may decline to be transferred to us. In addition, we are subject to numerous risks associated with our reliance on non-U.S. employees, including:
| • | volatility in the international financial markets; |
| • | compliance with a wide variety of laws and regulations, including foreign labor laws; |
| • | political and social risks; |
| • | changes in tax laws; and |
| • | costs and difficulties in staffing, managing, and monitoring international operations. |
We significantly rely on our affiliate in India for many aspects of our business, including accounting, engineering, construction financing and financial modeling, and if we were unable to transition some or any of the employees or if we were to need to replace or supplement our operations in India for any reason, such actions could have a material adverse effect on our business, NAV, financial condition, and results of operations.
Our projects are highly regulated and may be adversely affected by legislative or regulatory changes or a failure to comply with energy regulations.
Our project subsidiaries and offtakers are, and future projects and the related offtakers may be, subject to regulation by U.S. federal, state, and local authorities. Compliance with the requirements under these various regulatory regimes may cause us to incur significant costs, and failure to comply with such requirements could result in the shutdown of the non-complying facility or the imposition of liens, fines, or civil or criminal liability.
Each of the operational projects in our portfolio satisfies the requirements for either (i) “qualifying small power production facility,” or QF, status under the Public Utility Regulatory Policies Act of 1978, as amended, or PURPA, or (ii) status as an “Exempt Wholesale Generator,” or EWG, as defined under the Public Utility Holding Company Act of 2005, or PUHCA. Depending on the power production capacity of the project in question, our QFs, EWGs, and our project subsidiaries that own them may be entitled to various exemptions from ratemaking regulations and certain other regulatory provisions of the FPA (to the extent otherwise applicable), from the books and records access provisions of PUHCA, and from state organizational and financial regulation of electric utilities.
Certain of our operational project subsidiaries are subject to regulation for most purposes as “public utilities” under the FPA, including regulation of their rates and their issuances of securities. Each of the operational project subsidiaries that are public utilities and that are not otherwise exempt from regulation as a public utility with respect to certain sections of the FPA, has obtained or applied for “market-based rate authorization” and associated blanket authorizations and waivers from FERC under the FPA, which allows or will allow such project subsidiaries to sell electric energy, capacity, and ancillary services at wholesale at negotiated, market-based rates, instead of cost-of-service rates when received, and allows or will allow these subsidiaries blanket authority to issue securities.
In addition, many of our operational projects are located in regions in which the bulk power transmission system and associated wholesale markets for electric energy, capacity, and ancillary services are administered by ISOs and Regional Transmission Organizations, or RTOs, that are subject to FERC jurisdiction and operate under FERC jurisdictional tariffs, including open access transmission tariffs. We own operational projects in the California Independent System Operator, or CAISO, ISO New England, or ISO-NE, the MidContinent ISO, the Southwest Power Pool, Inc., and the PJM Interconnection LLC, each of which is a FERC-jurisdictional RTO or ISO that prescribes rules for the terms of participation in the wholesale electric energy and ancillary services markets (and for certain RTOs or ISOs, capacity markets as well) administered by that RTO or ISO. We also own operational projects located in the Electric Reliability Council of Texas, or ERCOT. ERCOT prescribes the rules for and terms of participation in the Texas energy market much like the other RTOs and ISOs mentioned, but those markets are not generally subject to FERC jurisdiction. Many of these entities can impose rules, restrictions, and terms of service that are quasi-regulatory in nature and may have a material adverse effect on our business. For example, ISOs and RTOs have developed bid-based locational pricing rules for the electric energy markets that they administer. In addition, most ISOs and RTOs have also developed bidding, scheduling, and market behavior rules, both to curb the potential exercise of market power by electricity generating companies and to ensure certain market functions and system
45
reliability. These rules, restrictions, and terms of service could change over time and could materially adversely affect our project subsidiaries’ ability to sell, and the price we receive for, our energy, capacity, and ancillary services.
The ability of an operational project subsidiary that is subject to and not otherwise exempt from regulation as a public utility under the FPA to charge the negotiated rates contained in its PPA is subject to that operational project subsidiary’s maintenance of its general authorization from FERC to sell electricity at market-based rates or maintenance of its QF status, if applicable. The failure of an operational project subsidiary that owns a QF to maintain its status as a QF and available exemptions under PURPA may result in that project subsidiary losing its PPA, interconnection agreement, and becoming subject to additional regulatory requirements. Failure to comply with applicable regulatory requirements may result in the imposition of civil penalties and disgorgement of profits as discussed further in the “Business—Regulatory Matters” section. In addition, FERC may revoke or suspend an operational project subsidiary’s market-based rate authorization if it determines that the project subsidiary can exercise market power in transmission or generation, create barriers to entry, or has engaged in abusive affiliate transactions. Further, the negotiated rates entered into under the PPAs of the project subsidiaries regulated as public utilities could be changed by FERC in certain circumstances if it determines such rates are no longer just and reasonable. If FERC were to make such a determination and as a result decrease the prices paid to us for energy delivered under any of our PPAs, our revenues could be below our projections, which could have a material adverse effect on our business, NAV, financial condition, and results of operations.
Our project subsidiaries, with the exception of those subsidiaries that only own projects in Hawaii, may also be subject to the mandatory reliability standards of the North American Electric Reliability Corporation, or NERC. The state of Hawaii has established a framework for creating a Hawaii Electric Reliability Administrator which is responsible for establishing and overseeing analogous standards. The NERC reliability standards are a series of requirements that relate to maintaining the reliability of the North American bulk electric system and cover a wide variety of topics, including physical security and cyber-security of critical assets, information protocols, frequency and voltage standards, testing, documentation, and outage management. If we fail to comply with these standards, we could be subject to sanctions, including substantial monetary penalties. Although our operational project subsidiaries are not subject to state utility rate regulation because they sell energy exclusively on a wholesale basis or are exempted under PURPA, we are subject to other state regulations that may affect our projects’ sale of energy and operations. Changes in state regulatory treatment are unpredictable and could have a material adverse effect on our business, NAV, financial condition, and results of operations.
The structure of the energy industry and its regulation in the United States is currently, and may continue to be, subject to change. Our project subsidiaries may be required to obtain additional regulatory approvals due to changes in law or for other reasons. We expect the laws and regulation applicable to our business and the energy industry generally to be in a state of transition for the foreseeable future. Changes in such laws and regulations could have a material adverse effect on our business, NAV, financial condition, and results of operations.
In addition to any potential sanctions or penalties resulting from our project subsidiaries’ failure to comply with the applicable laws, rules, and regulations described above, such non-compliance may also result in defaults or other adverse consequences under the financing or tax equity arrangements to which our project subsidiaries are parties because such agreements generally require our project subsidiaries to materially comply with applicable regulations and to maintain certain regulatory approvals. Any such penalties, sanctions, events of default, or other consequences could have a material adverse effect on our business, NAV, financial condition, and results of operations.
Certain of our projects are developed pursuant to BTAs, which subject us and our business to a variety of risks associated with the development, construction, and disposition of a project.
For some projects, we have entered into BTAs pursuant to which a utility agrees to acquire a renewable energy project from us rather than procure power from such project under a long-term PPA. As a result, certain of our projects are developed pursuant to a BTA, which is essentially a combination of a development and construction contract and a project sale agreement. If the demand for such arrangements from regulated utilities and others continues to persist, we may continue to develop additional projects pursuant to BTAs in the future. Similar to the other projects in our portfolio, the projects we are developing under BTAs subject us and our business to a variety of risks associated with the development, construction and disposition of a project. As the party under a BTA that is responsible for developing and constructing the project, our subsidiaries are subject to risks associated with, among other things, siting, permitting, subcontracting and, generally, the failure of a project to achieve completion and commercial operations, as further described in this “Risk Factors” section including under the heading “—Risks Related to the Development and Construction of our Renewable Energy Projects.” In addition to the obligation and
46
risks associated with the construction of a project, a BTA also contains various obligations and undertakings of our subsidiaries related to the sale of the project, which include representations, warranties, and covenants of the seller and corresponding obligations to indemnify the purchaser of the project for breaches of these representations, warranties, and covenants. If any representation, warranty, or covenant is untrue, breached, or otherwise not performed, we or our subsidiary may be required to indemnify the purchaser for damages resulting from such breach or inaccuracy. Further, in some cases, one of our subsidiaries may continue to operate a project developed under a BTA for some period of time following the transfer of the project, and in certain cases we provide limited warranty coverage of the projects, which subjects our subsidiaries to associated liabilities and other risks. The failure of a project being developed under a BTA to achieve completion and commercial operations, or the assertion of a material indemnification or warranty claim in connection with a BTA, could have a material adverse effect on our business, NAV, financial condition, and results of operations.
Risks Relating to Our Financing Activities
Our subsidiaries’ substantial amount of indebtedness may adversely affect our ability to operate our business and our failure to comply with the terms of our indebtedness could have a material adverse effect on our financial condition.
Our consolidated indebtedness, net of deferred financing costs, as of December 31, 2020, was approximately $2.5 billion. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our subsidiaries’ substantial indebtedness could have consequences on our business operations. For example,
| • | if our subsidiaries are unable to fulfill payment or other obligations or comply with their covenants under the agreements governing our indebtedness, such subsidiaries could default under such agreements or be rendered insolvent, or lenders may exercise rights and remedies under the terms of such agreements, such as foreclosure on us, our subsidiaries, or our and their projects or other assets, which could materially adversely affect our business and NAV, financial condition, and results of operations; |
| • | our subsidiaries’ debt service obligations require them to dedicate a substantial portion of their cash flows to pay principal and interest on their debt, thereby reducing their cash available to execute our business plan; |
| • | our subsidiaries’ substantial indebtedness could limit our ability to fund operations of future acquisitions and our financial flexibility, which could reduce our ability to plan for and react to unexpected opportunities and contingencies; |
| • | our subsidiaries' substantial indebtedness could potentially lead to taxable gains in excess of the cash proceeds to us from potential future project sales; |
| • | our subsidiaries’ substantial debt service obligations and maturities make us vulnerable to adverse changes in general economic, industry, and competitive conditions, credit markets, capital markets, and government regulation that could place us at a disadvantage compared to competitors with less debt or more capital resources; |
| • | the financing arrangements of certain of our subsidiaries are subject to cross-collateralization or other similar credit support arrangements that could heighten the risks associated with defaults under our and their debt obligations, increase the potential that adverse events relating to individual projects could materially affect our financing arrangements on a broader scale, or limit our ability to freely sell or finance some or all of our projects; and |
| • | our subsidiaries’ substantial indebtedness could limit our ability to obtain financing for working capital, including collateral postings, capital expenditures, debt service requirements, acquisitions, and general corporate or other purposes. |
If our subsidiaries do not comply with their obligations under their debt instruments, they may be subject to acceleration of the obligations thereunder, requiring them to refinance all or a part of the indebtedness under such instruments, which may force us to accept then-prevailing market terms that may be less favorable and could reduce our cash flow. If, for any reason, our subsidiaries are unable to refinance such indebtedness of our projects, those projects may be in default of their existing obligations, which may result in a foreclosure on the collateral and loss of the applicable projects. In addition, if for any reason our subsidiaries are unable to refinance the existing
47
indebtedness of our projects with new debt, we may issue additional common stock or other equity interests in us or any of our subsidiaries, which may dilute the value of the interest of the then-existing holders of common stock in our net assets, or we may be required to guarantee the obligations of our subsidiaries, which could subject us to increased credit risk. Any such events could have a material adverse effect on our business, NAV, financial condition, and results of operations.
In addition, increases in interest rates and changes in debt covenants may reduce the amounts that we can borrow, reduce our cash flows, and increase the equity investment we may be required to make in any projects we may develop or acquire. We expect that the project-level financing for any of our projects under construction will prohibit distributions until such project commences operations. If our subsidiaries are not able to generate sufficient operating cash flows to repay their outstanding indebtedness or otherwise are unable to comply with the terms of their indebtedness, we could be required to reduce capital expenditures and operating expenditures, reduce the scope of our projects, sell some or all of our projects, or delay construction of projects we may develop or acquire, all of which could have a material adverse effect on our business, NAV, financial condition, and results of operations.
We or our subsidiaries may not be able to obtain financing on attractive terms, or at all, which may adversely affect our ability to fund the development and construction of our projects. We expect to be dependent on tax equity financing arrangements, which may not be available in the future.
We rely heavily on third-party project debt and equity financing, including tax equity arrangements, to finance our business and the development and construction costs of our projects and other capital expenditures. The terms of our financing arrangements and the amount of financing available to us is dependent on a variety of factors, including general market conditions and assumptions with respect to the value of our projects and anticipated future cash flows. If we are unable to raise additional funds when needed, we may be required to delay or abandon development and construction of projects, reduce the scope of projects or abandon or sell some or all of our pre-construction projects, or default on our existing contractual commitments, and we also may not have funds sufficient for additional investments in our business that we might otherwise want to undertake. We also may be unable to refinance existing arrangements at their contractual maturity, which may cause us to default on such obligations and be subject to foreclosure by the project’s lenders. We may not be successful in locating suitable financing transactions in the time period required or at all, or on terms we find attractive, and we may not obtain the capital we require by other means, all of which could have a material adverse effect on our business, NAV, financial condition, and results of operations.
We often rely on third-party tax equity funding to capitalize on tax incentives available to our projects because we have not generally had sufficient tax capacity to make use of all such credits, and the market for those tax equity investors is particularly restricted to a small number of investors. We intend to develop or acquire projects in the future that utilize tax equity financing to monetize tax benefits available to certain renewable energy assets. However, no assurance can be given that tax equity investors will be available or willing to provide financing on acceptable terms at the time of any such development or acquisition or that the tax incentives and benefits that are needed to make tax equity financing available will remain in place.
Further, there are a limited number of potential tax equity investors. Such investors have limited appetite for tax equity financing and renewable energy developers, operators, and investors compete against one another and with others for their capital. We intend to develop or acquire projects in the future that utilize tax equity financing to monetize tax benefits available to certain renewable energy assets. However, no assurance can be given that tax equity investors will be available or willing to provide financing on acceptable terms at the time of any such development or acquisition or that the tax incentives and benefits that are needed to make tax equity financing available will remain in place. For example, the tax equity financing market was constrained during 2020 as a result of COVID-19 because tax equity investors were unable to estimate their estimated tax capacity due to volatility in the economy, and the market is just beginning to return to pre-COVID-19 capacity. Furthermore, as the renewable energy industry expands, the cost of tax equity financing may increase and there may not be sufficient tax equity financing available to meet the total demand in any year. Our business strategy depends on the availability of tax equity financing to develop and acquire additional assets. Therefore, our inability to enter into tax equity financing agreements with attractive pricing terms, or at all, could have a material adverse effect on our business, NAV, financial condition, results of operations, and cash flows.
48
We may be unable to secure refinancing of indebtedness on favorable terms or at all upon the maturity thereof and may be required to incur significant costs to novate existing swap arrangements in connection with a refinancing.
The outstanding project-level indebtedness for all of our projects is scheduled to mature prior to the anticipated end of such projects’ useful life and the full amortization of such loans. In addition, we have substantial other indebtedness, which is scheduled to mature in the next several years. Upon the maturity of such indebtedness, our ability to obtain refinancing on attractive terms is contingent on a number of factors, including changes to the prevailing market terms on which indebtedness is generally available, changes to the industry in which we operate, local market conditions in the jurisdictions in which our projects are located, the continued operating performance of our assets, future electricity market prices, the level of future interest rates, lenders’ appetite for investments in renewable energy and infrastructure assets, and assessment of our credit risk at the time. It may not be possible to secure refinancing on terms that we think are attractive or at all. Adverse terms may negatively affect our ability to operate our projects or may require us to use a significant portion of the project’s cash flow to may payments related to the debt financing. Further, the process of identifying new financing sources and agreeing on all relevant business and legal terms could be lengthy and could require us to slow the rate of the growth of our business until such new financing arrangements were in place. In connection with any refinancing, we could also be required to incur potentially significant costs associated with the novation or cash settlement of any outstanding swaps or other financial derivatives executed in connection with indebtedness being refinanced. Our failure to secure refinancing of indebtedness or inability to do so on terms that we think are commercially acceptable, and the costs associated with novating or settling any related derivatives in connection with any such refinancing, could materially adversely affect our business, NAV, results of operations, and financial conditions. We have historically used cash from refinancings to help fund our business and we may be adversely affected if we are unable to have continued access to this source of funding of our business.
We are exposed to risks inherent in our use of financial derivative arrangements, including interest rate swaps.
Most of our subsidiaries’ indebtedness accrues interest at variable rates, and such subsidiaries are parties to interest rate swaps that attempt to reduce the impact of interest rate volatility on such subsidiaries’ related payment obligations. In all cases, our project lenders require us to enter into swaps to provide an economic hedge for a very substantial portion of our variable rate debt. The use of interest rate swaps, however, does not eliminate the possibility of fluctuations in the value of the position or prevent losses if the value of the position declines. Such transactions may also limit the opportunity for gain if the value of a position increases. In addition, to the extent that actively quoted market prices and pricing information from external sources are not available, the valuation of these contracts will involve judgment or the use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts. We are also exposed to the risk of default by a swap counterparty, which may become a particularly pronounced risk in the case of a large-scale financial crisis.
If our interest rate swaps or any other financial derivative arrangements that we may enter into in the future perform in a manner that we do not anticipate, it could materially adversely affect our business, NAV, financial condition, and results of operations.
We guarantee certain of the obligations of our projects and other subsidiaries, and a requirement to make a payment under such guarantee may have a material adverse effect on our financial condition or liquidity.
Our subsidiaries incur various types of debt and other obligations. Project non-recourse debt or obligations are repayable solely from the applicable project’s or entity’s future revenues and, in some cases, are secured by the project’s or entity’s physical assets, major contracts, cash accounts, and our ownership interests in other entities. While we seek to secure project non-recourse debt for our projects, in certain cases we are unable to do so, and thus may be liable for some or all of our subsidiaries’ obligations in connection with certain limited recourse debt or obligations, where we (or another of our subsidiaries) have provided a limited guarantee, or full recourse debt or obligations, where we (or another of our subsidiaries) have provided a full guarantee, making us directly liable to creditors or counterparties if our subsidiaries default on such obligations. To satisfy these obligations, we may be required to use amounts distributed by our other subsidiaries, as well as other sources of available cash, reducing the cash available to execute our business plan. In addition, if our subsidiaries default on their obligations under non-recourse financing or other agreements, we may decide to make payments to prevent the creditors of these subsidiaries from foreclosing on the relevant collateral (which foreclosure would result in a loss of our ownership interest in the subsidiary or in some or all of its assets). Such payments or losses could have a material adverse effect on our business, NAV, financial condition, and results of operations.
49
The use of tax equity arrangements to finance projects limits certain management rights and operational flexibility with respect to those projects, as well as our rights to cash flows, tax credits, and depreciation deductions generated by those projects.
Nearly all of the projects in our current portfolio have tax equity financing arrangements in place, and we expect that some or all of our future projects will be financed with tax equity arrangements. Under many of these arrangements, a tax equity investor acquires an equity interest in the company that directly or indirectly owns the project, which entitles the tax equity investor to a significant percentage of the tax credits and depreciation deductions generated by the project, as well as a percentage of the project’s cash flows (which may be significant in certain transactions), until a certain point in time. If a project underperforms, it could delay such point in time and, as a consequence, a tax equity investor may become entitled to receive a greater percentage or, in some cases, all of the project’s cash flows until such point in time. The tax equity investor also has the right to approve most major management decisions with respect to the applicable project. These approval rights include decisions regarding material capital expenditures, replacement of major contracts, bankruptcy, and the sale of the applicable project. To the extent we want to incur project-level debt at a project in which we co-invest with a tax equity investor, we may be required to obtain the tax equity investor’s consent prior to such incurrence. In addition, the amount of debt that could be incurred by an entity in which we have a tax equity co-investor may be further constrained because even if the tax equity investor consents to the incurrence of the debt at the entity or project level, the tax equity investor may not agree to pledge its interest in the project, which could reduce the amount that can be borrowed by the entity. As a result, compliance with our obligations to our tax equity investors may prevent us from making certain business decisions.
Indemnification claims by a tax equity investor, project lender, or other counterparty may reduce our right to cash flows generated by a project and could result in a cross-default under project-level debt financing.
Certain of our project subsidiaries have made representations, warranties, and covenants to tax equity investors, project lenders, or other counterparties with respect to, among other things, a project’s initial and continued eligibility for tax credits, the tax basis of those assets and accelerated tax depreciation, and fulfillment of obligations under construction contracts, purchase and sale agreements, tax equity financing documents, and certain other project and finance agreements. The potential exposure of our project subsidiaries under such representations, warranties, or covenants is significant, and in certain cases, we or our subsidiaries provide guarantees or undertakings with respect to such obligations that could result in substantial liabilities that are recourse to us or our subsidiaries and not limited to the specific project. If any representation, warranty, or covenant is untrue or breached, we or our subsidiary may be required to indemnify the tax equity investors and the project subsidiary may be required to pay all of the project’s operating cash flow to the tax equity investors until such indemnity obligation is satisfied. Any such indemnity obligation or cash sweep by us or our project subsidiary could result in a cross-default under the terms of the project’s senior debt or impose material liabilities on us or our other subsidiaries, and correspondingly have a material adverse effect on our business, NAV, financial condition, and results of operations.
Cross-collateral arrangements among projects within our portfolio could expand the negative impact of a problem with one project to negatively affect other projects in our portfolio.
Certain of our projects are subject to cross-collateral arrangements pursuant to which their assets are pledged to secure obligations related to projects that our respective operating subsidiary does not own. Under the terms of these arrangements, the failure of one or more of our subsidiaries to perform its obligations under contracts related to one of our projects could allow the counterparty to foreclose on one or more projects that might otherwise not have been negatively affected. The result of a foreclosure event under a cross-collateral arrangement could amplify the negative impact of an issue that might have otherwise affected only the specific project for which the performance obligations were not satisfied and have a material adverse effect on our business, NAV, financial condition, and results of operations.
We do not wholly own certain of our projects. If we are unable to find suitable partners or investors, or experience disagreements with our existing partners or investors, our business plans, including our ability to recycle capital in our business, and results of operations, could be adversely affected.
Many projects in our portfolio are owned through certain joint ventures or with other partners and, near the completion of construction of our projects, we typically sell a minority interest in our projects, usually up to 49.9%, to investment funds that we refer to as the AssetCo funds. In some cases, all or a portion of our projects are owned
50
by an investment fund we manage, and in some cases our management decisions are subject to investor consent rights. Our co-owners and fund investors may have interests that are different from ours which may result in conflicting views as to the conduct and management of the projects. Although we currently control these and expect to control future projects, we may not be able to favorably resolve disagreements with our partners or investors arising from a particular issue to come before the project, or as to the operation or management of the project, and such disagreements could hinder the operations of such project, or require additional management resources and attention. Any disagreements with our partners or investors could adversely affect our business plans, including our ability to recycle capital in our business, and results of operations.
We may not be able to fund our business through sales of existing assets or equity in our existing projects, which could adversely affect our liquidity to fund future growth.
We may seek to fund future acquisitions and the development and construction of new projects by selling assets or equity interests in our projects. Our ability to sell such assets or interests, and the prices we receive upon a sale, may be affected by many factors, and we may be unable to execute our strategy. In particular, these factors could arise from weakness in or the lack of demand, changes in the financial condition or prospects of prospective purchasers and the availability of financing to potential purchasers on reasonable terms, the number of prospective purchasers, the number of competing properties on the market, unfavorable local, national, or international economic conditions, including as a result of the COVID-19 pandemic, industry trends, and changes in laws, regulations, or fiscal policies of jurisdictions in which the asset is located. We may not be able to sell such assets or interests, the terms of any such sales may not meet our expectations, and we may incur losses in connection with those sales, which could result in less liquidity to fund future growth. Failure to complete such sales may cause us to seek liquidity from alternative sources, such as raising additional debt or equity and diluting existing stockholders, or completing securitizations, which may be less favorable to our stockholders and could have a material adverse impact on our business, NAV, financial condition, and results of operations.
The phase-out of the London Interbank Offered Rate, or LIBOR, may adversely affect a portion of our outstanding debt.
In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. The ICE Benchmark Administration, the administrator of LIBOR, has ceased to publish USD LIBOR for the one week and two month USD LIBOR tenors. Further, on March 5, 2021, the ICE Benchmark Administration announced its intention to cease the publication of the remaining USD LIBOR tenors after June 30, 2023. While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new USD LIBOR issuances by the end of 2021. In light of these recent announcements, the future of LIBOR at this time is uncertain and any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR’s phase-out could cause LIBOR to perform differently than in the past or cease to exist. Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative floating borrowing rate, may adversely affect our borrowing costs. In addition, the phase-out of LIBOR could affect interest rates for our variable rate debt and interest rate swap arrangements and potential mismatches of newly adopted interest rates could potentially cause our hedges not to be effective. Certain of our debt instruments have interest rates that are LIBOR based and will not have matured prior to the phase-out of LIBOR. We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative floating borrowing rates on the portion of our outstanding debt that is LIBOR based. Challenges in changing to a different borrowing rate may result in less favorable pricing on certain of our debt instruments and could have an adverse effect on our financial results and cash flows.
Risks Related to this Offering and Ownership of our Common Stock
Our directors, executive officers, and principal stockholders will continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control.
Pursuant to a proxy agreement between our co-founders and the D. E. Shaw GW Investment Holdings, L.L.C., our co-founders will collectively control the voting rights with respect to the election of directors of approximately % of our outstanding common stock (or approximately % if the underwriters exercise their option to purchase additional shares of common stock in full). Concurrent with this offering, our co-founders will enter into a voting agreement among themselves with respect to the election of our directors.
51
Furthermore, our directors, executive officers, and each of our 5% stockholders and their affiliates, in the aggregate, will beneficially own approximately % of the outstanding shares of our common stock after this offering, based on the number of shares outstanding as of , 2022 and assuming the underwriters’ option to purchase additional shares of common stock is not exercised. These stockholders will be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions, or other extraordinary transactions. These stockholders may have interests that differ from yours, including with respect to short- or long-term goals, and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing, or deterring a change of control of us, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of us, and might ultimately affect the market price of our common stock.
We will be a “controlled company” within the meaning of the Nasdaq rules and the rules of the SEC. As a result, we will qualify for exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.
After completion of this offering, pursuant to a proxy agreement between D. E. Shaw GW Investment Holdings, L.L.C. and each of Bryan Martin and David Zwillinger, Mr. Martin and Mr. Zwillinger each will hold a proxy over shares of common stock held by D. E. Shaw GW Investment Holdings, L.L.C. with respect to the election of directors of the Company, and separately, Mr. Martin and Mr. Zwillinger will agree among themselves to vote their shares together with respect to the election of directors of the Company. Because during the term of the proxy agreement more than 50% of the voting power in the election of our directors will be held by Mr. Martin and Mr. Zwillinger, acting as a group, we will be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. As a controlled company, we may elect not to comply with certain corporate governance requirements, including:
| • | the requirement that a majority of our board of directors consist of “independent directors” as defined under the rules of Nasdaq; |
| • | the requirement that we have a compensation committee that is composed entirely of directors who meet the Nasdaq independence standards for compensation committee members with a written charter addressing the committee’s purpose and responsibilities; and |
| • | the requirement that our director nominations be made, or recommended to our full board of directors, by our independent directors or by a nominations committee that consists entirely of independent directors and that we adopt a written charter or board resolution addressing the nominations process. |
Following this offering, we intend to utilize certain of these exemptions and if we utilize any of these exemptions, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
An active, liquid trading market for our common stock may not develop.
Prior to this offering, there has been no public market for our common stock. Although we expect to list our common stock on Nasdaq, we cannot guarantee an active public market for our common stock will develop or be sustained after this offering. If an active and liquid trading market does not develop, you may have difficulty selling or may not be able to sell any of the shares of our common stock that you purchase.
Our stock price may decline or may be volatile regardless of our operating performance, and you may not be able to resell your shares of common stock at or above the initial public offering price.
The market price of our common stock could be subject to significant fluctuations. The price of our common stock may change in response to our results of operations in future periods and also may change in response to other factors, including factors specific to companies in our industry. As a result, our share price may experience significant volatility that is not necessarily reflective the value of our expected performance. Among other factors that could affect our stock price are:
| • | changes in laws or regulations applicable to our industry or offerings; |
| • | speculation about our business in the press or investment community; |
| • | investor interests in environmental, social and governance-focused companies; |
52
| • | price and volume fluctuations in the overall stock market; |
| • | volatility in the market price and trading volume of companies in our industry or companies that investors consider comparable; |
| • | sales of our common stock by us or our principal stockholders, officers, and directors; |
| • | the expiration of contractual lock-up agreements; |
| • | the development and sustainability of an active trading market for our common stock; |
| • | success of competitive products or services; |
| • | the public’s response to press releases or other public announcements by us or others, including our filings with the SEC, announcements relating to litigation, or significant changes in our key personnel; |
| • | the effectiveness of our internal controls over financial reporting; |
| • | changes in our capital structure, such as future issuances of debt or equity securities; |
| • | our entry into new markets; |
| • | tax developments in the United States or other countries; |
| • | strategic actions by us or our competitors, such as acquisitions or restructurings; and |
| • | changes in accounting principles. |
Further, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. The stock prices of many energy-related companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions such as recessions, interest rate changes, or international currency fluctuations, may cause the market price of our common stock to decline.
You may not be able to resell any of your shares of our common stock at or above the initial public offering price. The initial public offering price will be determined by negotiations between us and the representative of the underwriters and may not be indicative of prices that will prevail in the trading market, if a trading market develops, after this offering. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment and may lose some or all of your investment.
We do not intend to pay regular cash dividends on our common stock.
Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, after taking into account our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant. As a result, if our board of directors does not declare any such cash dividends, then capital appreciation in the price of our common stock, if any, may be your only source of gain on an investment in our common stock. See “Dividend Policy.”
We will be a holding company and our principal asset after completion of the Reorganization Transactions including this offering will be our interest in DESRI Holdings, L.P. and, accordingly, we will be dependent upon DESRI Holdings, L.P. and its subsidiaries for our results of operations and cash flows.
Upon completion of this offering and the Reorganization Transactions, we will be a holding company and have no material assets other than our ownership of L.P. Interests. As such, we have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses, or declare and pay dividends in the future, if any, depend upon the results of operations and cash flows of DESRI Holdings, L.P., and its subsidiaries and distributions we receive from DESRI Holdings, L.P. DESRI Holdings, L.P. and its subsidiaries may not generate sufficient cash flow to distribute funds, and applicable state law and contractual restrictions may prohibit such distributions.
53
The price of our common stock could decline if securities analysts do not publish research or if securities analysts or other third parties publish unfavorable research about us.
The trading of our common stock is likely to be influenced by the reports and research that industry or securities analysts publish about us, our business, our market, or our competitors. We do not currently have and may never obtain research coverage by securities or industry analysts. If no or few securities or industry analysts commence coverage of us, the trading price for our common stock would be negatively affected. If we obtain securities or industry analyst coverage but one or more analysts downgrade our common stock or publish unfavorable research about our business, our stock price would likely decline. If one or more securities or industry analysts ceases to cover us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
The issuance by us of additional shares of common stock or convertible or other equity securities may dilute your ownership of us and incurrence of indebtedness may restrict our operations, both of which could adversely affect our stock price.
We intend to file a registration statement with the SEC on Form S-8 providing for registration of our shares of our common stock issued or reserved for issuance under the DESRI Inc. 2022 Omnibus Incentive Plan in connection with this offering. Subject to the satisfaction of vesting conditions and the expiration of lock-up agreements, shares registered under the registration statement on Form S-8 will be available for resale immediately in the public market without restriction. From time to time in the future, we may also issue additional shares of our common stock, securities convertible into common stock, or other equity securities to raise additional capital or pursuant to a variety of transactions, including acquisitions. The issuance by us of additional shares of our common stock or securities convertible into our common stock would dilute your ownership of us and the sale of a significant amount of such shares in the public market could adversely affect prevailing market prices of our common stock. We may also seek additional capital through debt financings. The incurrence of indebtedness would result in increased fixed payment obligations and could involve restrictive covenants, such as limitations on our ability to incur additional debt, to make capital expenditures, to create liens, or to redeem stock or declare dividends, that could adversely affect our ability to conduct our business.
Future sales, or the perception of potential future sales, by us or our existing stockholders in the public market following this offering could cause the market price for our common stock to decline.
The sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. Upon completion of this offering, we will have a total of shares of our common stock outstanding ( shares if the underwriters exercise their option to purchase additional shares of common stock in full).
All of the shares of common stock sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, or Rule 144, may be sold only in compliance with the limitations described under “Shares Eligible for Future Sale.” We, our executive officers, directors, and certain holders of our outstanding securities will sign lock-up agreements with the underwriters that will, subject to certain exceptions, restrict the sale of the shares of our common stock and certain other securities held by them for 180 days following the date of this prospectus. Goldman Sachs & Co. LLC may, at its discretion and at any time, release all or any portion of the shares or securities subject to any such lock-up agreements. See “Underwriting” for a description of these lock-up agreements.
Investors in this offering will experience immediate and substantial dilution of $ per share.
The assumed initial public offering price of $ per share of common stock (the midpoint of the price range set forth on the cover page of this prospectus) exceeds as adjusted net tangible book value of $ per share of common stock. Based on the assumed initial public offering price of $ per share of common stock, stockholders will incur immediate and substantial dilution of $ per share of common stock. See “Dilution.”
54
Anti-takeover provisions in our governing documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management, and depress the market price of our common stock.
Our certificate of incorporation, bylaws, and Delaware law contain or will contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors. Among others, our amended and restated certificate of incorporation and/or amended and restated bylaws will include the following provisions:
| • | a staggered board, which means that our board of directors is classified into three classes of directors with staggered three-year terms; |
| • | limitations on convening special stockholder meetings, which could make it difficult for our stockholders to adopt desired governance changes; |
| • | advance notice procedures, which apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders; |
| • | a prohibition on stockholder action by written consent, which means that our stockholders will only be able to take action at a meeting of stockholders; |
| • | a forum selection clause, which means certain litigation against us can only be brought in Delaware; |
| • | no authorization of cumulative voting, which limits the ability of minority stockholders to elect director candidates; |
| • | special meetings of our stockholders may be called at any time only by or at the direction of the board of directors, the chairman of the board of directors, the Chief Executive Officer, or the Executive Chairman; |
| • | directors will only be able to be removed for cause on or after the date that the holders of our common stock immediately prior to the consummation of this offering (and certain of their permitted transferees) collectively own less than 50% of our outstanding common stock; |
| • | certain amendments to our amended and restated certificate of incorporation will require the approval of two-thirds of the then outstanding voting power of our capital stock; |
| • | our amended and restated bylaws will provide that the affirmative vote of two-thirds of the then outstanding voting power of our capital stock, voting as a single class, is required for stockholders to amend or adopt any provision of our amended and restated bylaws; and |
| • | the authorization of undesignated or “blank check” preferred stock, the terms of which may be established and shares of which may be issued without further action by our stockholders. |
Any provision of our amended and restated certificate of incorporation, amended and restated bylaws, or Delaware law that has the effect of delaying, preventing, or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
As a result of the FPA and FERC’s regulations in respect of transfers of control, absent prior authorization by FERC, neither we nor DESRI Holdings, L.P. can convey, nor will an investor in our company or its affiliate and associate companies generally be permitted to obtain in the aggregate, a direct and/or indirect voting interest in 10% or more either of our issued and outstanding voting securities, the voting securities of our public utility operating subsidiaries, and the voting securities of any of our intermediate holding companies through which we may indirectly hold our interests in our public utility operating subsidiaries.
Following this offering, we will be a holding company under PUHCA with U.S. operating subsidiaries that are regulated by FERC as “public utilities” under the FPA. As a result, the FPA requires us, DESRI Holdings, L.P., and/or our U.S. public utility subsidiaries, as the case may be, either to (i) obtain prior authorization from FERC to transfer an amount of our voting securities sufficient to convey direct or indirect control over any of our public utility subsidiaries or (ii) qualify for a blanket authorization granted under or an exemption from FERC’s regulations in respect of transfers of control. Similar restrictions apply to any purchaser of our voting securities that is a “holding company” under PUHCA, in a holding company system that includes a transmitting utility or an electric utility, or an “electric holding company,” regardless of whether our voting securities are purchased in this offering, subsequent offerings by us or DESRI Holdings, L.P., in open market transactions or otherwise. A purchaser of our voting securities would be a “holding company” under PUHCA if the purchaser acquires direct or indirect control over 10% or more of our voting securities, the voting securities of our public utility operating subsidiaries, and the voting
55
securities of any of our intermediate holding companies through which we may indirectly hold our interests in our public utility operating subsidiaries, or if FERC otherwise determines that the purchaser could directly or indirectly exercise control over our management or policies or the management or policies of public utility operating subsidiaries or the intermediate holding companies through which we may indirectly own our public utility operating subsidiaries (e.g., as a result of contractual board or approval rights). Under PUHCA, a “public-utility company” is defined to include an “electric utility company,” which is any company that owns or operates facilities used for the generation, transmission or distribution of electric energy for sale, such as our U.S. operating subsidiaries. Accordingly, absent prior authorization by FERC or a general increase to the applicable percentage ownership under a blanket authorization, for the purposes of sell-side transactions by us or DESRI Holdings, L.P. and buy-side transactions involving purchasers of our securities that are already holding companies under PUHCA, purchasers are restricted in the amount of common stock they may acquire in this offering or otherwise as set forth in the following paragraph.
To ensure compliance with FPA Section 203 and FERC’s regulations in respect of transfers of control, and consistent with the requirements for blanket authorizations granted thereunder or exemptions therefrom, absent prior authorization by FERC, no holder of our common stock will be permitted to own or control, together with its affiliates (as defined in FERC’s market-based rate regulations) and associate companies, 10% or more directly or indirectly of the voting equity of any of our public utility subsidiaries through ownership or control directly or indirectly of (i) our common stock or other voting securities, (ii) the voting equity of our public utility operating subsidiaries, and (iii) the voting equity of any of our intermediate holding companies through which we indirectly hold interests in its public utility operating subsidiaries (the “Applicable Interests”). Additionally, holders of our common stock should manage their investment in us in a manner consistent with FERC’s regulations in respect of obtaining direct or indirect “control” of our company. Accordingly, following the completion of this offering, absent prior authorization by FERC, investors in our common stock and their affiliate and associate companies are advised not to acquire in the aggregate a direct and/or indirect voting interest in 10% or more either of our issued and outstanding voting securities, the voting securities of our public utility operating subsidiaries, and the voting securities of any of our intermediate holding companies through which we may indirectly hold our interests in our public utility operating subsidiaries, in each case whether in connection with an offering by us or DESRI Holdings, L.P., open market purchases, or otherwise. A violation of these regulations, including through open market purchases or otherwise, could subject the party in violation or our public utility subsidiaries to civil or criminal penalties under the FPA, including civil penalties of up to approximately $1.4 million per day per violation and other possible sanctions imposed by FERC under the FPA. Any holder of our common stock, together with their affiliates and associate companies, that acquires in the aggregate 10% or more of Applicable Interests will be prohibited from exercising voting rights with respect to such common stock unless prior authorization from the FERC for acquisition of such Applicable Interests is received.
Our governing documents will provide that the Delaware Court of Chancery will be the sole and exclusive forum for substantially all disputes between us and our stockholders and federal district courts will be the sole and exclusive forum for Securities Act claims, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, the Delaware Court of Chancery is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a duty (including any fiduciary duty) owed by any of our current or former directors, officers, stockholders, employees or agents to us or our stockholders, (iii) any action asserting a claim against us or any of our current or former directors, officers, stockholders, employees or agents arising out of or relating to any provision of the DGCL, our amended and restated certificate of incorporation, or our amended and restated bylaws, and (iv) any action asserting a claim against us or any of our current or former directors, officers, stockholders, employees or agents governed by the internal affairs doctrine of the State of Delaware. This provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act, or rules and regulations thereunder. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all claims brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder, and our amended and restated certificate of incorporation will provide that the federal district courts of the United States of America will, to the fullest extent permitted by law, be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. Our decision to adopt such a federal forum provision followed a decision by the Supreme Court of the State of Delaware holding that such provisions are facially valid under Delaware law. While there can be no assurance that
56
federal or state courts will follow the holding of the Delaware Supreme Court or determine that our federal forum provision should be enforced in a particular case, application of our federal forum provision means that suits brought by our stockholders to enforce any duty or liability created by the Securities Act must be brought in federal court and cannot be brought in state court.
Section 27 of the Exchange Act creates exclusive federal jurisdiction over all claims brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, and our amended and restated certificate of incorporation will provide that the exclusive forum provision does not apply to suits brought to enforce any duty or liability created by the Exchange Act. Accordingly, actions by our stockholders to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder must be brought in federal court. Our stockholders will not be deemed to have waived our compliance with the federal securities laws and the regulations promulgated thereunder.
Any person or entity purchasing or otherwise acquiring or holding any interest in any of our securities shall be deemed to have notice of and consented to our exclusive forum provisions, including the federal forum provision; provided, however, that stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. Additionally, our stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. The choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers, other employees, and agents. Alternatively, if a court were to find the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially and adversely affect our business, NAV, financial condition, and results of operations.
We are an “emerging growth company” and intend to take advantage of the reduced disclosure requirements applicable to emerging growth companies which may make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. As an emerging growth company, we are not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, we have reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and we are exempt from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Additionally, as an emerging growth company, we have elected to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As such, our consolidated financial statements may not be comparable to companies that comply with public company effective dates. Investors may find our shares of common stock less attractive because we may rely on these provisions. If some investors find our shares of common stock less attractive as a result of the foregoing, there may be a less active trading market for our shares and our share price may be more volatile.
The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an “emerging growth company.”
As a public company, we will be subject to the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly, and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. Section 404(a) of the Sarbanes-Oxley Act requires that, beginning with our second annual report following our initial public offering, management assess and report annually on the effectiveness of our internal controls over financial reporting and identify any material weaknesses in our internal controls over financial reporting. If we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, then we may not be able to obtain the certifications required by that act, which may preclude us from keeping our filings with the SEC current, and interfere with the ability of investors to trade our securities and our ability to list our shares on any national securities exchange. To maintain and improve the effectiveness of our disclosure controls and procedures, we will need to commit significant resources, hire additional staff, and provide additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. Sustaining our growth also will require us to commit additional management, operational, and financial resources to identify new professional to join our company and to maintain
57
appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns and will result in increased costs to us, which could have a material adverse effect on our results of operations, financial condition, business, or NAV.
Historically, we have incurred net losses and we may be unable to achieve or sustain profitability in the future.
We incurred net losses of $(278.1) million and $(159.9) million for the years ended December 31, 2020 and 2019, respectively. These historical operating and net losses were due to a number of factors, including net realized and unrealized losses on derivative financial instruments. We expect to incur significant expenses and losses as we finance the expansion of our operations and implement additional internal systems and infrastructure to support our growth. In addition, as a public company, we will incur significant additional legal, accounting, and other expenses that we do not incur as a private company. We do not know whether our revenue will grow rapidly enough to absorb these costs. Our ability to achieve profitability depends on a number of factors. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.
Our operating results and our ability to grow may fluctuate from quarter to quarter and year to year, which could make our future performance difficult to predict and could cause our operating results for a particular period to fall below expectations.
Our quarterly and annual operating results and our ability to grow are difficult to predict and may fluctuate significantly in the future. We have experienced seasonal and quarterly fluctuations in the past and expect to experience such fluctuations in the future. In addition to the other risks described in this “Risk Factors” section, the following factors could cause our operating results to fluctuate:
| • | fluctuations in demand for solar or wind energy; |
| • | our ability to complete our wind and solar projects in a timely manner; |
| • | the availability, terms, and costs of suitable financing; |
| • | our ability to continue to expand our operations and the amount and timing of expenditures related to this expansion; |
| • | announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, or capital-raising activities or commitments; |
| • | expiration or initiation of any governmental rebates or incentives; |
| • | actual or anticipated developments in our competitors’ businesses, technology, or the competitive landscape; and |
| • | natural disasters or other weather or meteorological conditions. |
For these or other reasons, the results of any prior quarterly or annual periods should not be relied upon as indications of our future performance.
Our actual financial results may differ materially from any guidance we may publish from time to time.
We may, from time to time, provide guidance regarding our future performance that represents our management’s estimates as of the date such guidance is provided. Any such guidance would be based upon a number of assumptions with respect to future business decisions (some of which may change) and estimates, while presented with numerical specificity, are inherently subject to significant business, economic, and competitive uncertainties and contingencies (many of which are beyond our control). Guidance is necessarily speculative in nature and it can be expected that some or all the assumptions that inform such guidance will not materialize or will vary significantly from actual results. Our ability to meet any forward-looking guidance is affected by a number of factors, including, but not limited to, the number of PPAs we enter into and projects that start or complete construction, changes in construction and operating costs, the availability of financing on acceptable terms, the availability of rebates, tax credits, and other incentives, changes in policies and regulations, the availability and cost of solar panels, wind turbines, inverters, batteries, and other raw materials, as well as the other risks to our business described in this “Risk Factors” section. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date such guidance is provided. Actual results may vary from such guidance and the variations may be material.
58
Investors should also recognize the reliability of any forecasted financial data diminishes the farther into the future the data is forecast. In light of the foregoing, investors should not place undue reliance on our financial guidance and should carefully consider any guidance we may publish in context.
If our long-lived assets or project-related assets become impaired, we may be required to record significant charges to earnings.
We may be required to record significant charges to earnings should we determine that our long-lived assets or project-related assets are impaired. Such charges may have a material impact on our financial position and results of operations. We review long-lived and project-related assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We consider a project commercially viable or the carrying amount of its assets recoverable if the expected operating cash flows for the project exceed the carrying amount of the asset. If our projects are not considered commercially viable, we would be required to impair the respective assets, which may have a material adverse effect on our business, NAV, financial condition, and results of operations.
If the assumptions underlying our asset retirement obligations are materially inaccurate, our costs could be significantly greater than anticipated.
Our asset retirement obligations primarily consist of our estimated cost relating to decommissioning project equipment and surface land reclamation at the end of the useful life of each project. These obligations are determined for each project using various estimates and assumptions including, among other items, estimates of equipment removal costs, estimates of inflation rates, and the timing of these expenses, which is based on the estimated economic life of the project and the applicable reclamation laws and regulations. These cash flows are discounted using a credit-adjusted, risk-free rate. Our management and consultants periodically review these estimates. If our assumptions do not materialize as expected, actual cash expenditures and costs that we incur in connection with asset retirements could be materially different than currently estimated. Moreover, regulatory changes could increase our obligations to perform reclamation, project closing, and post-closure activities. The resulting estimated asset retirement obligation could change significantly if actual amounts change significantly from our assumptions, which could have a material adverse effect on our results of operations and financial condition.
Risks Related to our Separation from the D. E. Shaw Group
Our historical condensed and pro forma financial information may not be representative of the results we would have achieved as a stand-alone public company and may not be a reliable indicator of our future results.
The historical condensed and pro forma financial information that we have included in this prospectus may not necessarily reflect what our financial position, results of operations, or cash flows would have been had we been an independent entity during the periods presented and may not reflect the financial position we will achieve in the future. The costs and expenses reflected in our historical and pro forma financial information include an allocation for certain corporate functions historically provided by the D. E. Shaw group, including executive oversight, risk management, information technology, legal and compliance, investor relations, human resources, tax, procurement, and other services, which may be different from the expenses for such services that we would have incurred had we operated as a stand-alone company during such periods. We have not adjusted our historical condensed or pro forma financial information to reflect changes that will occur in our cost structure, financing, and operations as a result of our transition to becoming a stand-alone public company, including changes in our employee base, potential increased costs associated with reduced economies of scale, and increased costs associated with SEC reporting and Nasdaq requirements. Therefore, our historical carve-out condensed and pro forma financial information may not be indicative of what our financial position, results of operations, or cash flows may be in the future.
We have no operating history as an independent company upon which you can evaluate our performance and, accordingly, our prospects must be considered in light of the risks that any newly independent company encounters.
Until this offering, DESRI has operated as a business unit within the D. E. Shaw group. Accordingly, we have no experience operating as an independent company and performing some of the corporate functions that have been previously performed for us on a centralized basis by the D. E. Shaw group, including certain human resources, tax administration, legal and compliance, investor relations, communications, certain insurance, information technology, and telecommunications services. Our prospects must be considered in light of the risks, expenses, and difficulties encountered by companies in the early stages of independent business operations, particularly companies such as ours in highly competitive markets.
59
The transitional services that the D. E. Shaw group will provide to us following this offering may not be sufficient to meet our needs, and we may have difficulty finding replacement services or be required to pay increased costs to replace these services after our transitional services agreement expires.
Historically, the D. E. Shaw group has provided certain corporate and shared services to us, and, following the completion of this offering, the D. E. Shaw group will continue to provide certain of those corporate and shared services for us for a period of time. We will pay fees for the services provided by the D. E. Shaw group following this offering, and such services will be meaningfully narrower in scope than the services historically provided to us by the D. E. Shaw group. The terms of these services and amounts to be paid by us to the D. E. Shaw group will be provided in the transition services agreements, which we refer to as the Transition Services Agreements, described in “Certain Relationships and Related Party Transactions.” As these services are being provided to us by the D. E. Shaw group, our operational flexibility to modify or implement changes with respect to such services or the amounts we pay for them will be limited. The services provided to us by the D. E. Shaw group may be inadequate or may not be provided in a satisfactory or effective manner. We may not be able to replace these services or enter into appropriate third-party agreements on terms and conditions, including quality or cost, comparable to those that we have historically received from the D. E. Shaw group, or that we will receive from the D. E. Shaw group under the Transition Services Agreements. Although we intend to replace the services currently provided by the D. E. Shaw group, we may encounter difficulties replacing certain services or be unable to negotiate pricing or other terms as favorable as those we currently have in effect. For example, implementing our own cybersecurity framework may make us more vulnerable to cyber-attacks, network disruptions, and other information systems breaches as we will no longer benefit from the D. E. Shaw group’s control systems. Further, we have historically received informal support from the D. E. Shaw group, which may not be addressed in the Transition Services Agreements. The level of this informal support will diminish following the separation as we become a stand-alone company.
DESRI Holdings, L.P., will agree in the Separation Agreement not to make an election under Section 6226 of the Code in respect of any imputed underpayment determined in connection with any tax proceeding in respect of a tax period that ends on or prior to or includes the date of this offering. As a result, such imputed underpayment will be assessed against DESRI Holdings, L.P., rather than any current or former partner of DESRI Holdings, L.P. The amount of DESRI Holdings, L.P.'s liability for such imputed underpayment could be substantial and would be borne economically by DESRI Holdings, L.P.'s partners at the time such imputed underpayment is assessed.
DESRI Holdings, L.P. will agree in the Separation Agreement not to make an election under Section 6226 of the Code (or any similar provision of state or local tax law) in respect of any imputed underpayment determined in connection with any tax audit or administrative or judicial proceeding in respect of a tax period that ended on or prior to or includes the date of this offering without the consent of DESRI Inc. or its “partnership representative” (as defined in section 6223 of the Code). As a result, such an imputed underpayment will be assessed against DESRI Holdings, L.P., rather than any current or former partner of DESRI Holdings, L.P. The practical effect of not making an election under Section 6226 of the Code is for DESRI Inc., as the sole ultimate beneficial owner of DESRI Holdings, L.P., to economically bear the full cost of the imputed underpayment, notwithstanding that, had the election under Section 6226 of the Code been made, the imputed underpayment would have been assessed against those persons who were partners of DESRI Holdings, L.P. during the tax period to which the imputed underpayment relates, rather than against DESRI Holdings, L.P. The amount of an imputed underpayment for which DESRI Holdings, L.P., is liable as a consequence of not having made an election Section 6226 could be substantial, and none of D. E. Shaw & Co., L.P., or any of its affiliates will have any obligation to indemnify, contribute to, or otherwise reimburse DESRI Inc. or any of its affiliates (including DESRI Holdings, L.P.) with respect to any such imputed underpayment.
We may not be able to resolve favorably disputes that arise between the D. E. Shaw group and us with respect to our past and ongoing relationships.
Disputes may arise between the D. E. Shaw group and us in a number of areas relating to our past and ongoing relationship. We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable to us than if we were dealing with an unaffiliated party. The agreements that we will enter into with the D. E. Shaw group may be amended upon agreement between the parties. We may not have the leverage to negotiate amendments to these agreements, if required, on terms as favorable to us as those we would negotiate with an unaffiliated third party.
We may not realize the potential benefits from this offering.
We may not achieve the anticipated benefits from this offering for a variety of reasons. For example, the process of separating our business from the business of the D. E. Shaw group and operating as an independent public
60
company may distract our management from focusing on our business and strategic priorities. In addition, although we will have direct access to the debt and equity capital markets following this offering, we may not be able to issue debt or equity on terms acceptable to us or at all. The availability of shares of our common stock for use as consideration for acquisitions also will not ensure that we will be able to successfully pursue acquisitions or that the acquisitions will be successful. Moreover, even with equity compensation tied to our business we may not be able to attract and retain employees as desired. We also may not fully realize the anticipated benefits from our separation if any of the matters identified as risks in this “Risk Factors” section were to occur. If we do not realize the anticipated benefits from our separation for any reason, our business may be materially adversely affected.
61
We expect to receive net proceeds of approximately $ million (or approximately $ million if the underwriters exercise their option to purchase additional shares of common stock in full) from the sale of our common stock by us in this offering assuming an initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated offering expenses and underwriting discounts and commissions payable by us.
We intend to use $ million of the net proceeds from this offering to fund the cash consideration for the contribution by the D. E. Shaw group of its outstanding partnership interests in DESRI Holdings, L.P. to DESRI Inc. as described in “Organizational Structure,” based on the assumed initial public offering price of $ per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus).
We intend to use the remaining $ million of net proceeds, based on the assumed initial public offering price of $ per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus), from this offering for general corporate purposes, including to fund development and construction activities on our projects, working capital, and operating expenses. In addition, we may use proceeds from this offering to opportunistically fund project acquisitions and other strategic opportunities.
We do not have any definitive plans for the allocation of the particular uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business, and we may allocate the net proceeds from this offering to the specified uses set forth above or for other general corporate purposes.
Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus) would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
Each increase (decrease) of one million in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $ , assuming no change in the assumed initial public offering price of $ per share, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.
62
DESRI Inc., a Delaware corporation, was formed on August 25, 2021 and is the issuer of the common stock offered by this prospectus. Prior to this offering and the Reorganization Transactions, our business operations have been conducted through DESRI Holdings, L.P. and its direct and indirect subsidiaries. Following this offering and the Reorganization Transactions, DESRI Inc. will be treated as a corporation for U.S. federal income tax purposes and our business operations will become taxable at DESRI Inc. at the corporate tax rate.
Reorganization Transactions
We intend to undertake the following organizational transactions in connection with the offering, or collectively, the Reorganization Transactions:
| • | we will file our amended and restated certificate of incorporation in Delaware and adopt our amended and restated bylaws; |
| • | prior to the contributions listed below, DESRI Holdings, L.P. will distribute approximately $ of cash to its equityholders, representing substantially all of its unrestricted cash as of the distribution date; |
| • | the D. E. Shaw group will contribute approximately 1.0% of the outstanding partnership interests in DESRI Holdings, L.P. to DESRI Inc. in exchange for shares of DESRI Inc.; |
| • | DESRI Inc. will contribute the approximately 1.0% interest in DESRI Holdings, L.P. it receives to a recently-formed subsidiary that is taxed as a corporation in exchange for equity of such subsidiary; |
| • | the partners of DESRI Holdings, L.P. will contribute the remaining approximately 99.0% of the outstanding partnership interests in DESRI Holdings, L.P. to DESRI Inc. in exchange for shares of DESRI Inc. and, with respect to the portion of such partnership interests contributed by the D. E. Shaw group, shares of DESRI Inc. and $ million in cash, with the amount of cash to be funded from the net proceeds of this offering; |
| • | we will appoint DESRI Inc. as the general partner of DESRI Holdings, L.P.; |
| • | we will issue shares of our common stock to the purchasers in this offering in exchange for net proceeds of approximately $ million based upon an assumed initial public offering price of $ per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus) less the underwriting discounts and commissions and estimated offering expenses payable by us; and |
| • | DESRI Inc. will enter into (i) the Registration Rights Agreement with certain holders of our common stock, (ii) the Transition Services Agreements with the D. E. Shaw group, and (iii) the Separation Agreement with the D. E. Shaw group. |
Following this offering, we will be a holding company under PUHCA with U.S. operating subsidiaries that are regulated by FERC as “public utilities” under the FPA. As a result, the FPA requires us, DESRI Holdings, L.P., and/or our U.S. public utility subsidiaries, and/or purchasers of common stock that are also holding companies, as the case may be, either to (i) obtain prior authorization from FERC to transfer or acquire an amount of our voting securities sufficient to convey direct or indirect control over any of our public utility subsidiaries or (ii) qualify for a blanket authorization granted under or an exemption from FERC’s regulations in respect of transfers of control. To ensure compliance with FPA Section 203 and FERC’s regulations in respect of transfers of control, and consistent with the requirements for blanket authorizations granted thereunder or exemptions therefrom, absent prior authorization by FERC, no holder of our common stock will be permitted to own or control, together with its affiliates (as defined in FERC’s market-based rate regulations) and associate companies, 10% or more directly or indirectly of the voting equity of any of our public utility subsidiaries through ownership or control directly or indirectly of (i) our common stock or other voting securities, (ii) the voting equity of our public utility operating subsidiaries, and (iii) the voting equity of any of our intermediate holding companies through which we indirectly hold interests in our public utility operating subsidiaries (the “Applicable Interests”). Additionally, holders of our common stock should manage their investment in us in a manner consistent with FERC’s regulations in respect of obtaining direct or indirect “control” of our company. Accordingly, following the completion of this offering, absent prior authorization by FERC, investors in our common stock and their affiliate and associate companies are advised not to acquire in the aggregate a direct and/or indirect voting interest in 10% or more either of our issued and outstanding voting securities, the voting securities of our public utility operating subsidiaries, and the voting securities of any of our intermediate holding companies through which we may indirectly hold our interests in our public utility operating subsidiaries, in each case whether in connection with an offering by us or DESRI Holdings, L.P., open market purchases, or otherwise. A violation of these regulations, including through open market purchases or otherwise, could subject the party in violation or our public utility subsidiaries to civil or criminal penalties under the FPA, including civil penalties of up to approximately $1.4 million per day per violation and other possible sanctions imposed by FERC under the FPA. Any holder of our common stock, together with their affiliates and associate companies, that acquires in the aggregate 10% or
63
more of Applicable Interests will be prohibited from exercising voting rights with respect to such common stock unless prior authorization from the FERC for acquisition of such Applicable Interests is received.
The following diagram summarizes our organizational and ownership structure after giving effect to the Reorganization Transactions, including this offering. The chart below assumes no exercise of the underwriters’ option to purchase additional shares of common stock. See “Business—Our Projects—Our Operational and Construction Project Portfolio.”
| * | The AssetCo funds and co-investors own interests in some, but not all, of the balance sheet projects. |
The D. E. Shaw group currently holds 1% passive ownership interests in certain of our operating subsidiaries. Prior to or concurrently with the Reorganization Transactions, the D. E. Shaw group will sell us certain of these interests for $ million and will acquire certain other 1% passive ownership interests in certain of our operating subsidiaries for $ million.
64
Company Capitalization
The following table sets forth the cash and cash equivalents and capitalization as of September 30, 2021:
| • | of DESRI Holdings, L.P. on an actual basis; |
| • | of DESRI Holdings, L.P. on a pro forma basis after giving effect to the Reorganization Transactions (excluding this offering); and |
| • | of DESRI Inc. on a pro forma as adjusted basis after giving effect to the Reorganization Transactions, including the sale by us of shares of common stock in this offering at an assumed initial public offering price of $ per share (the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses), and the use of proceeds therefrom. |
The following table is derived from and should be read together with the sections of this prospectus entitled “Use of Proceeds,” “Unaudited Pro Forma Consolidated Financial Information,” “Summary Historical and Pro Forma Consolidated Financial Data,” “Organizational Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and accompanying notes included elsewhere in this prospectus.
| | | As of September 30, 2021 | |||||||
| | | Actual | | | Pro Forma | | | Pro Forma as Adjusted(1) | |
| | | ($ in thousands, except share numbers) | |||||||
Cash: | | | | | | | |||
Cash | | | $25,198 | | | | | ||
Restricted cash and restricted cash equivalents | | | 161,115 | | | | | ||
Total cash | | | $186,313 | | | $ | | | $ |
Corporate Debt(2): | | | | | | | |||
Revolving credit facility(3) | | | $19,900 | | | | | ||
Subordinated non-recourse loan | | | 283,508 | | | | | ||
Total Corporate Debt | | | $303,408 | | | | | ||
Non-or Limited-Recourse Debt: | | | | | | | |||
Equipment financing facility | | | 86,256 | | | | | ||
Consolidated fund loans | | | 83,223 | | | | | ||
Development JV loan | | | 22,000 | | | | | ||
Land facility | | | 39,493 | | | | | ||
Development facility | | | 11,870 | | | | | ||
Project non-recourse credit facilities(4) | | | 2,437,583 | | | | | ||
Total Non-or Limited-Recourse Debt | | | 2,680,425 | | | | | ||
Total Debt | | | 2,983,832 | | | | | ||
Equity: | | | | | | | |||
Non-controlling interests: | | | 958,065 | | | | | ||
Members’ equity (deficit): | | | 218,465 | | | | | ||
Total equity: | | | $1,176,530 | | | $ | | | $ |
Total capitalization: | | | $4,160,362 | | | $ | | | $ |
| 1) | Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the estimated initial public offering price range we show on the cover of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, total Stockholders’ Equity and total capitalization by approximately $ million each, assuming that the number of shares offered by us, which we show on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase (decrease) the number of shares of common stock we are offering. Each increase (decrease) of 1,000,000 shares of common stock at the assumed initial public offering |
65
price of $ per share, which is the midpoint of the estimated initial public offering price range we show on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, total Stockholders’ equity and total capitalization by approximately $ million each, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
| 2) | Excludes unamortized deferred financing costs. |
| 3) | The revolving credit facility provides for up to $53 million of borrowing capacity, with $8.1 million of available capacity as of September 30, 2021. |
| 4) | Consists of certain non-recourse or limited recourse financing arrangements entered into by our project subsidiaries. See “Description of Certain Financing Arrangements.” |
Project Capitalization
Our solar projects are capitalized by (i) non-recourse (or limited recourse) project debt, (ii) non-controlling tax equity, and/or (iii) “cash equity” from the project’s owners. Typically, we expect a project to be capitalized at COD with approximately 45% to 50% project debt, 40% tax equity, and 10% to 15% cash equity, although there can be significant variance between projects. Generally, we seek to maximize the amount of non-recourse debt our projects can raise, and minimize the amount of tax equity and cash equity required, due to the relatively cheaper cost of capital for non-recourse debt and the value of limited financial covenants for these debt financings. We also typically enter into economic interest rate hedges to protect the stability of our long-term cash flows, including all operational and construction projects where we enter into interest rate swaps for approximately 100% of the outstanding debt. In addition, the equity in our projects is accounted for at book value (i.e., cost), rather than market value. As a result, consolidated leverage ratios, which includes all debt (including non-recourse, project-level debt) to the book value of equity, will appear high. However, such leverage ratios may not accurately account for the level of financing risk in our business, as non-recourse lenders to any one project would not have collateral in the remainder of our assets. Moreover, the market value of the equity in the project, in which such lenders do have collateral, may exceed the book value because the book value is based on non-cash metrics and represents cost, as opposed to the project’s market value.
66
Since December 31 2017, DESRI Holdings, L.P. has made distributions of more than $285 million in the aggregate, including $34 million, $30 million and $35 million in 2019, 2020 and 2021, respectively.
While we do not currently intend to pay regular cash dividends on our common stock on an annual or quarterly basis, we may pay special dividends from time to time. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, after taking into account our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant.
Under Delaware law, dividends may be payable only out of surplus, which is calculated as our net assets less our liabilities and our capital, or, if we have no surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
Our ability to pay dividends may also be restricted by the terms of any credit agreement or any future debt or preferred or tax equity interests of us or our subsidiaries. Accordingly, you may need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. See “Risk Factors—Risks Related to this Offering and Ownership of our Common Stock—We do not intend to pay regular cash dividends on our common stock for the foreseeable future.”
67
If you invest in our common stock in this offering, you will experience immediate and substantial dilution in the net tangible book value per share of our common stock upon the completion of this offering.
As used in this “Dilution” section, (i) our pro forma net tangible book deficit per share is determined by dividing our pro forma net tangible book deficit (tangible assets less total liabilities) by the total number of our outstanding common stock that will be outstanding immediately prior to the completion of this offering but after giving effect to the Reorganization Transactions, and (ii) our pro forma as adjusted net tangible book deficit per share of common stock represents pro forma net tangible book deficit divided by the number of shares of common stock outstanding immediately after giving effect to the Reorganization Transactions and the completion of this offering.
Our pro forma net tangible book deficit as of September 30, 2021, was approximately $ million, or approximately $ per share.
After giving effect to the sale of common stock in this offering at an assumed initial public offering price of $ per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting estimated underwriting discounts and commissions and offering expenses, our pro forma as adjusted net tangible book deficit as of September 30, 2021 would have been approximately $ million, or approximately $ per share. This represents an immediate increase in the net tangible book value of $ per share to existing stockholders and an immediate dilution (i.e., the difference between the initial public offering price and the pro forma as adjusted net tangible book deficit after this offering) to new investors participating in this offering of $ per share.
The following table illustrates the per share dilution to new investors participating in this offering:
Assumed initial public offering price per share | | | | | $ | |
Pro forma net tangible book deficit per share as of September 30, 2021 | | | $ | | | |
Increase per share attributable to new investors in this offering | | | | | ||
Pro forma as adjusted net tangible book deficit per share | | | | | ||
Dilution per share to new investors in this offering(1) | | | | | $ |
| (1) | Dilution is determined by subtracting pro forma as adjusted net tangible book value per share from the initial public offering price paid by a new investor. |
Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book deficit as of September 30, 2021 by approximately $ million, the pro forma as adjusted net tangible book value per share by $ per share and the dilution to new investors in this offering by $ per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses.
The following table summarizes on a pro forma as adjusted basis of , the total number of shares of common stock owned by our existing stockholders immediately prior to this offering and to be owned by the new investors in this offering, the total consideration paid, and the average price per share paid by our existing stockholders and to be paid by the new investors in this offering at $ , the midpoint of the price range set forth on the cover page of this prospectus, calculated before deducting estimated underwriting discounts and commissions and offering expenses:
| | | Shares Purchased | | | Total Consideration | | | Average Price Per Share | |||||||
| | | Number | | | Percentage | | | Amount | | | Percentage | | |||
Our existing stockholders | | | | | % | | | $ | | | % | | | $ | |
New investors in this offering | | | | | % | | | $ | | | % | | | $ | |
Total | | | | | % | | | $ | | | % | | | $ | |
68
DESRI Inc. was formed on August 25, 2021 and does not have historical financial results. DESRI Inc. currently has no assets or liabilities and has conducted no operations. The unaudited pro forma consolidated statement of operations for the year ended December 31, 2020 and for the nine months ended September 30, 2021 is based on our historical audited consolidated statement of operations for the year ended December 31, 2020 and our unaudited condensed consolidated statement of operations for the nine months ended September 30, 2021 and includes pro forma adjustments to give effect to the Reorganization Transactions, including this offering, as described under “Organizational Structure,” as if such transactions occurred on January 1, 2020. The unaudited pro forma condensed consolidated balance sheet as of September 30, 2021 is based on our historical unaudited condensed consolidated balance sheet as of September 30, 2021 and includes pro forma adjustments to give effect to (i) the Reorganization Transactions, as described under “Organizational Structure,” as if such transactions had occurred on September 30, 2021 and (ii) the use of the estimated net proceeds from this offering, as described under “Use of Proceeds.”
The following unaudited pro forma condensed consolidated financial statements and the related notes should be read in conjunction with the sections titled “Use of Proceeds”, “Capitalization,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and DESRI Holdings, L.P.’s historical consolidated financial statements and related notes thereto included elsewhere in this prospectus.
The pro forma data presented reflect events directly attributable to the described transactions and certain assumptions that we believe are reasonable. The pro forma data are not necessarily indicative of financial results that would have been attained had the described transactions occurred on the dates indicated below or that could be achieved in the future because they necessarily exclude various operating expenses, such as incremental general and administrative expense associated with being a public company. The pro forma adjustments are based on currently available information and certain estimates and assumptions. Therefore, the actual adjustments may differ from the pro forma adjustments. However, management believes that the assumptions provide a reasonable basis for presenting the significant effects of the transactions as contemplated and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed consolidated financial statements.
The unaudited pro forma condensed consolidated financial statements and related notes are included for informational purposes only and do not purport to reflect the results of operations or financial position of DESRI Inc. that would have occurred had DESRI Inc. been in existence or operated as a public company during the periods presented. If this offering and other transactions contemplated herein had occurred in the past, our operating results might have been materially different from those presented in the unaudited pro forma financial statements. The unaudited pro forma condensed consolidated financial statements should not be relied upon as being indicative of our results of operations or financial position had the described transactions occurred on the dates assumed. The unaudited pro forma condensed consolidated financial information also does not project our results of operations or financial position for any future period or date. Future results may vary significantly from the results reflected in the unaudited pro forma condensed consolidated financial information and such information should not be relied on as an indication of our results after the consummation of this offering and the other transactions contemplated by such unaudited pro forma condensed consolidated financial statements.
69
DESRI Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of September 30, 2021
(in thousands, except par value amounts)
| | | DESRI Holdings, L.P. (Historical) | | | Reorganization Transaction Adjustments | | | DESRI Inc. (Pro Forma) | |
ASSETS | | | | | | | |||
CURRENT ASSETS: | | | | | | | |||
Cash | | | $25,198 | | | | | ||
Restricted cash and restricted cash equivalents | | | 161,115 | | | | | ||
Accounts receivable | | | 22,009 | | | | | ||
Due from related parties, current | | | 27,670 | | | | | ||
Derivative assets, current | | | 140 | | | | | ||
Deposits, current | | | 14,804 | | | | | ||
Prepaid expenses and other current assets | | | 17,322 | | | | | ||
Total current assets | | | 268,258 | | | | | ||
Property, plant and equipment, net | | | 4,007,777 | | | | | ||
Investments | | | 148,321 | | | | | ||
Due from related parties | | | 4,876 | | | | | ||
Derivative assets | | | 63,253 | | | | | ||
Deposits | | | 169,633 | | | | | ||
Other assets | | | 77,553 | | | | | ||
TOTAL ASSETS | | | $4,739,671 | | | | | ||
LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS, AND EQUITY | | | | | | | |||
CURRENT LIABILITIES: | | | | | | | |||
Accounts payable | | | $36,807 | | | | | ||
Accrued liabilities | | | 116,419 | | | | | ||
Due to related parties | | | 512 | | | | | ||
Derivative liabilities, current | | | 36,861 | | | | | ||
Current portion of long-term debt, net of unamortized deferred financing costs | | | 36,359 | | | | | ||
Other current liabilities | | | 45,579 | | | | | ||
Total current liabilities | | | 272,537 | | | | | ||
Long-term debt, net of unamortized deferred financing costs | | | 2,902,723 | | | | | ||
Derivative liabilities | | | 230,204 | | | | | ||
Deferred tax liabilities | | | 2,282 | | | | | ||
Asset retirement obligations | | | 63,954 | | | | | ||
Other liabilities | | | 44,813 | | | | | ||
TOTAL LIABILITIES | | | 3,516,513 | | | | | ||
Commitment and contingencies | | | | | | | |||
Redeemable non-controlling interests | | | 46,628 | | | | | ||
EQUITY: | | | | | | | |||
Members’ equity (deficit) | | | 218,465 | | | | | ||
Common stock - $0.01 par value per share, shares authorized on a pro forma basis, shares issued and outstanding on a pro forma basis | | | | | | | |||
Additional paid in capital | | | | | | | |||
Non-controlling interests | | | 958,065 | | | | | ||
TOTAL EQUITY | | | 1,176,530 | | | | | ||
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST, AND EQUITY | | | $4,739,671 | | | | |
70
DESRI Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 2020
(in thousands, except share and per share data)
| | | DESRI Holdings, L.P. (Historical) | | | Reorganization Transaction Adjustments | | | DESRI Inc. (Pro Forma) | |
Revenue | | | $148,966 | | | | | ||
Cost of revenue: | | | | | | | |||
Depreciation and amortization | | | 61,065 | | | | | ||
Operating and maintenance | | | 29,665 | | | | | ||
Total cost of revenue | | | 90,730 | | | | | ||
Gross profit | | | 58,236 | | | | | ||
Operating expenses: | | | | | | | |||
General and administrative | | | 29,192 | | | | | ||
Project development | | | 12,241 | | | | | ||
Total operating expenses | | | 41,433 | | | | | ||
Operating income / (loss) | | | 16,803 | | | | | ||
Other income / (expense): | | | | | | | |||
Net realized and unrealized gains / (losses) on derivative financial instruments | | | (235,586) | | | | | ||
Interest expense | | | (69,288) | | | | | ||
Other income (expense), net | | | 10,960 | | | | | ||
Total other expense | | | (293,914) | | | | | ||
Net Income / (Loss) before Income Taxes | | | (277,111) | | | | | ||
(Provision for) / benefit from income taxes | | | (1,038) | | | | | ||
Net Income / (Loss) | | | $(278,149) | | | | | ||
Less: Net (income) / loss attributable to redeemable and non-redeemable non-controlling interests | | | 203,529 | | | | | ||
Net income / (loss) attributable to DESRI Inc. and Subsidiaries | | | $(74,620) | | | | | ||
Pro Forma Loss per Share | | | | | | | |||
Basic and Diluted | | | | | | | |||
Pro Forma Number of Shares Used in Computing Loss Per Share: | | | | | | | |||
Basic and Diluted | | | | | | |
71
DESRI Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Nine Months Ended September 30, 2021
(in thousands, except share and per share data)
| | | DESRI Holdings, L.P. (Historical) | | | Reorganization Transaction Adjustments | | | DESRI Inc. (Pro Forma) | |
Revenue | | | $168,866 | | | | | ||
Cost of revenue: | | | | | | | |||
Depreciation and amortization | | | 62,488 | | | | | ||
Operating and maintenance | | | 30,631 | | | | | ||
Total cost of revenue | | | 93,119 | | | | | ||
Gross profit | | | 75,747 | | | | | ||
Operating expenses: | | | | | | | |||
General and administrative | | | 25,449 | | | | | ||
Project development | | | 14,714 | | | | | ||
Total operating expenses | | | 40,163 | | | | | ||
Operating income / (loss) | | | 35,584 | | | | | ||
Other income / (expense): | | | | | | | |||
Net realized and unrealized gains / (losses) on derivative financial instruments | | | 153,996 | | | | | ||
Interest expense | | | (44,507) | | | | | ||
Other income (expense), net | | | 4,826 | | | | | ||
Total other expense | | | 114,315 | | | | | ||
Net Income / (Loss) before Income Taxes | | | 149,899 | | | | | ||
(Provision for) / benefit from income taxes | | | (3,036) | | | | | ||
Net Income / (Loss) | | | $146,863 | | | | | ||
Less: Net (income) / loss attributable to redeemable and non-redeemable non-controlling interests | | | 91,468 | | | | | ||
Net income / (loss) attributable to DESRI Inc. and Subsidiaries | | | $238,331 | | | | | ||
Pro Forma Loss per Share | | | | | | | |||
Basic and Diluted | | | | | | | |||
Pro Forma Number of Shares Used in Computing Loss Per Share: | | | | | | | |||
Basic and Diluted | | | | | | |
72
DESRI Inc. and Subsidiaries
Notes to unaudited pro forma consolidated financial information
| 1. | Description of the Reorganization Transactions & Basis of Presentation |
The unaudited pro forma consolidated statement of operations for the year ended December 31, 2020 and for the nine months ended September 30, 2021 is based on our historical audited consolidated statement of operations for the year ended December 31, 2020 and our unaudited consolidated statement of operations for the nine months ended September 30, 2021 and includes pro forma adjustments to give effect to the Reorganization Transactions, including this offering, as described under “Organizational Structure,” as if such transactions occurred on January 1, 2020. The unaudited pro forma consolidated balance sheet as of September 30, 2021 is based on our historical unaudited consolidated balance sheet as of September 30, 2021 and includes pro forma adjustments to give effect to (i) the Reorganization Transactions, including this offering, as described under “Organizational Structure,” as if such transactions had occurred on September 30, 2021 and (ii) the use of the estimated net proceeds from this offering, as described under “Use of Proceeds.”
Reorganization Transactions
DESRI Inc., a Delaware corporation, was formed on August 25, 2021 and is the issuer of the common stock offered by this prospectus. Prior to this offering, our business operations have been conducted through DESRI Holdings, L.P. and its direct and indirect subsidiaries.
We will effect a series of transactions, or collectively, the Reorganization Transactions, in which DESRI Holdings, L.P. will become a subsidiary of DESRI Inc., the existing partners of DESRI Holdings, L.P. will exchange their outstanding partnership interests in DESRI Holdings, L.P. for a combination of shares of DESRI Inc. and cash and we will appoint DESRI Inc. as the general partner of DESRI Holdings, L.P. As the general partner of DESRI Holdings, L.P., DESRI Inc. will operate and control all of the business and affairs of DESRI Holdings, L.P. and its subsidiaries and will have the obligation to absorb losses and receive benefits from DESRI Holdings, L.P. The Reorganization Transactions, whereby DESRI Inc. began to consolidate DESRI Holdings, L.P. in its consolidated financial statements, will be accounted for as a reorganization of entities under common control. As a result, the consolidated financial statements of DESRI Inc. will include the assets and liabilities received in the Reorganization Transactions at their historical carrying amounts, as reflected in the historical consolidated financial statements of DESRI Holdings, L.P.
For a complete description of the Reorganization Transactions, see section entitled “Organizational Structure” included elsewhere in this prospectus.
| 2. | Notes to Unaudited Pro Forma Consolidated Balance Sheet |
Adjustments related to the Reorganization Transactions
| (a) | This pro-forma adjustment reflects certain Reorganization Transactions, wherein the existing partners of DESRI Holdings, L.P. will exchange their outstanding partnership interests in DESRI Holdings, L.P. in exchange for a combination of shares of DESRI Inc. and cash, with the amount of cash to be funded from the net proceeds of this offering. |
| (b) | This pro-forma adjustment reflects certain deferred costs associated with this offering, including certain legal, accounting, and other related expenses, which have been recorded in prepaid expenses and other current assets on our unaudited consolidated balance sheet. Upon completion of this offering, these deferred costs will be charged against the proceeds from this offering with a corresponding reduction to additional paid-in capital. |
| (c) | This pro-forma adjustment reflects the recognition of a deferred tax liability as a result of the Reorganization Transactions. |
73
| (d) | This pro-forma adjustment reflects the net effect on cash of the receipt of offering proceeds to us of $ , based on the assumed sale of shares of common stock at an assumed initial public offering of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the legal, accounting and other related expenses associated with the offering payable by us. |
| 3. | Notes to Unaudited Pro Forma Consolidated Statement of Operations |
Adjustments related to the Reorganization Transactions
| (a) | The D. E. Shaw group allocates a portion of its overhead expenses to the Company while the Company is under the control of the D. E. Shaw group. Following the Reorganization Transactions, we will no longer be allocated overhead and will instead incur costs independently of the D. E. Shaw group, except for certain costs charged to us in accordance with the transition services agreements between us and the D. E. Shaw group. This pro-forma adjustment reflects the net expense impact of this change for the respective period. |
| (b) | Following the Reorganization Transactions, DESRI Inc. will be subject to U.S. federal income taxes, in addition to applicable state and local taxes, with respect to any net taxable income generated by our operations. DESRI Holdings, L.P, has been, and will continue to be, treated as a partnership for U.S. federal and state income tax purposes. As such, taxable income generated by DESRI Holdings, L.P., which will be wholly-owned by DESRI Inc. and its subsidiary, will flow through to us, and will be subject to federal income tax at the prevailing corporate tax rate. |
| (c) | This pro-forma adjustment reflects the net change in employee compensation expenses as a result of our separation from the D. E. Shaw group and the execution of certain compensation agreements related to the offering. |
| (d) | Pro-forma earnings per share is computed by dividing the net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. |
74
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the section titled “Summary Historical and Pro Forma Financial Data,” “Unaudited Pro Forma Condensed Consolidated Financial Information,” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements, such as those relating to our plans, objectives, expectations, intentions, and beliefs, which involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” included elsewhere in this prospectus.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as shown below and in a manner that management believes best reflects our view of the business, including a focus on liquidity and capital resources, and related results of our operations.
| • | Overview and Business: Provides a general description of our business and the industry in which we operate. For more information regarding our business and the renewable energy industry, see “Business” and “Our Market Opportunity.” |
| • | Our Growth Strategy and Recent Achievements: Provides management’s discussion on the achievement of certain milestones and recent accomplishments contributing to our long-term value creation and growth of our net asset value. |
| • | Significant Factors and Trends Affecting Our Business: Provides a description of the significant factors or industry trends that are most likely to affect our operating results. |
| • | Key Performance Metrics: |
| ○ | Net Asset Value: Provides information about our net asset value, or NAV, including a discussion of how we calculate NAV, assumptions utilized, and NAV sensitivities; and |
| ○ | Operating EBITDA: Provides investors a supplemental measure commonly used by securities analysts and banks to evaluate the financial performance of our core operational project portfolio and ability to service debt related to our operational projects. |
| • | Liquidity and Capital Resources: Provides a discussion on our approach to minimizing our cost of capital, information about our sources and uses of liquidity and our ability to meet our short-term and long-term financing needs, and a summary of our capital expenditures. |
| • | Cash Flows Analysis: Provides an analysis of the drivers of our operating, investing, and financing cash flows for all periods presented. |
| • | Components of Consolidated Statements of Operations: Provides an explanation of the components of our consolidated statements of operations. |
| • | Results of Operations: Provides the results of our operations for the periods presented. |
| • | Off Balance Sheet Arrangements: Provides a description, if any, of our off balance sheet arrangements. |
| • | Critical Accounting Policies and Estimates: Provides a discussion of those accounting policies and estimates that we consider important to an understanding of our consolidated financial statements and results of operations. |
| • | JOBS Act: Provides a discussion of the application of the “emerging growth company” transition period provided in Section 7(a)(2)(B) of the Securities Act. |
| • | Quantitative and Qualitative Disclosure about Market Risk: Provides a discussion of the market risk we are exposed to in the ordinary course of our business. |
Overview and Business
We are a top-five, pure-play, renewable energy IPP in the United States based on total gross capacity of operating projects as of September 30, 2021, according to Wood Mackenzie. We develop, construct, own, and operate
75
high-quality renewable energy projects across the country. Since 2010, we have been building a dynamic company that we believe is poised for success in a rapidly evolving industry. Our diversified portfolio of utility-scale, renewable energy assets includes 67 projects in 25 states representing 6,468 MW of capacity across contracted pre-construction, construction, and operational phases. Substantially all of the PPA counterparties for our current projects with signed PPAs are investment-grade entities, which collectively have a capacity-weighted average rating of A and A3 based on Standard & Poor’s and Moody’s credit ratings, respectively. The weighted-average remaining term of the PPAs in our portfolio is approximately 22 years as of September 30, 2021. In addition, we have a robust uncontracted development pipeline made up of over 11 GW of renewable power generation projects and over 1 GW of energy storage projects. Each of these projects is owned by DESRI—or subject to a binding agreement for DESRI to acquire the project—and has an application filed for an interconnection agreement (or a signed agreement), control of applicable land rights, or both.
Our business is focused on long-term value creation as opposed to short-term profits. We are building long-term infrastructure assets and focus on driving long-term value with these assets. Our primary business objective is to maximize NAV over time. We seek to achieve this by sourcing opportunities to originate and own high-quality projects that generate long-term, stable cash flows.
We drive value throughout the project lifecycle, including through:
| • | the origination of high-quality projects; |
| • | the optimization of project contracts and financings; and |
| • | a sustained focus on value-accretive enhancements throughout the construction and operational phases. |
We believe that we are well-positioned to take advantage of favorable trends in the U.S. power industry, including the massive replacement cycle of aging and uneconomic electricity infrastructure, the cost competitiveness of renewable energy relative to other fuel sources, and the growing demand by consumers, utilities, and corporations for renewable energy. Furthermore, our team is actively incorporating energy storage into our portfolio given its increasingly important role in renewable energy power generation. In particular, the compelling developments in battery technology have the potential to expand our TAM, as battery storage projects represent an additional market opportunity that has the potential of adding another revenue stream to the projects in our portfolio, as well as growing the TAM for utility-scale solar and wind more generally.
Our Growth Strategy and Recent Achievements
We have created a differentiated and resilient business model which is focused on long-term value creation and NAV growth. We seek to accomplish this through our disciplined investment approach, de-risking our portfolio while maintaining optionality for the future, and optimizing our cost of capital. The decisions that we make during the development and construction phases are intended to maximize value throughout a project’s lifecycle as opposed to short-term profits. For example, we may decide to develop and construct a project with lower operating income and a 30-year PPA instead of a 15-year PPA project with higher, short-term operating income and increased merchant exposure, if we believe this will be more accretive to overall NAV.
Our team of experienced renewable energy professionals is focused on delivering value at every stage of a project’s lifecycle, and we achieve this by successfully executing our strategy in the following ways:
Identify and add new, economically attractive projects to our portfolio.
We continuously evaluate opportunities to add to our portfolio of high-quality renewable energy projects. We proactively source our projects through multiple channels, including through our internal development team, joint ventures, existing relationships with offtakers, acquisitions, expansion of existing projects, and opportunistic investments. The vast majority of our recent projects were originated by our internal development team or our joint ventures, but the mix for project origination changes with market dynamics. Between January 1, 2019 and September 30, 2021, we signed or acquired more than 35 PPAs totaling approximately 3.1 GW. As of September 30, 2021, we have 10 contracted projects under construction representing 1.5 GW, nine of which signed a PPA while controlled by DESRI. Of the 18 contracted pre-construction projects in our development pipeline, all but one signed a PPA while controlled by DESRI.
We often focus on developing deep expertise and insight into certain development efforts and work closely with counterparties to grow in targeted regions, efforts which are undertaken to ensure strategic, early-entrant status. Such
76
recent efforts have concentrated on specific regions, such as Utah and the Midwest where we have executed PPAs representing 675 MW and 2,223 MW, respectively, as of September 30, 2021.
We work to optimize the capital structure for individual projects with project non-recourse debt, tax equity, subordinated non-recourse financing, and the sale of minority interests to significantly reduce our cost of capital and need for holding company equity contributions. We believe that our financing expertise, longstanding industry relationships, and strong financial position, including our fixed revenue contracts, have enabled us, and will continue to enable us, to source tax equity financing and low-cost, long-duration, non-recourse project finance debt to fund the construction and operation of our projects. We value fostering strong relationships with creditworthy, financing counterparties, as evidenced by the 33 different lenders and 14 different tax equity investors utilized in our current portfolio for our project debt and tax equity financings, respectively through September 30, 2021.
During 2019, we secured tax equity funding commitments and project non-recourse financing commitments of approximately $409.2 million and $1.0 billion, respectively. Despite the economic uncertainties associated with COVID-19, during 2020, we secured tax equity funding commitments and project non-recourse financing commitments of approximately $345.8 million and $885.0 million, respectively. Through the nine months ended September 30, 2021, we secured tax equity funding commitments and project non-recourse financing commitments of approximately $428.3 million and $1.6 billion, respectively. With a continual emphasis on procuring project non-recourse financing with highly attractive terms, ensuring a low cost of capital, we averaged approximately LIBOR + 130 bps for new project financings during 2019, 2020, and the nine months ended September 30, 2021. Such favorable terms were achieved as a result of our extensive financing expertise, strong development efforts, and industry knowledge, and were based on sound, high-quality projected project performance, which is further substantiated through verification by third-party, independent engineers and consultants. We closed financing for 614 MW, 527 MW, and 1.2 GW of our projects during 2019, 2020, and the nine months ended September 30, 2021, respectively.
Convert non-operational contracted projects into operational assets at a high success rate and substantially increase the value of our existing portfolio by optimizing a project throughout its lifecycle.
Through our project optimization, improvement, and advancement efforts, we have established a track record of converting non-operational projects into high-quality operational assets at a high success rate. We continually pursue opportunities to improve project value, including optimizing the development, construction, financing, and operations of our projects. For example, through relationships with industry-leading equipment vendors, we are able to efficiently and cost-effectively source high-quality modules and other key equipment that are covered under the terms of long-term warranties. During 2019, 2020, and the nine months ended September 30, 2021, we acquired 775 MW, 1.1 GW, and 1.6 GW, respectively, of modules from Tier 1 vendors, such as First Solar, Jinko, and Longi. Our in-house design and procurement team collaborates with our development and financing team to optimize design and improve the value of each project.
On the operational front, we continuously look for opportunities to improve project performance and NAV. In 2019, we implemented annual infrared solar panel inspections across the operational portfolio to (i) ensure standard degradation rates do not exceed .03 to .07 in accordance with equipment warranties and (ii) monitor project performance to allow for timely identification of possible performance issues. Finally, in the last five years, we successfully re-negotiated certain terms for 17 of our long-term operating and maintenance contracts, which resulted in economically favorable revisions to the annual, contracted operations and maintenance costs for such projects.
In 2019 and 2020, we completed our “safe harbor” initiative, which involved the purchase of approximately $130 million in solar modules and tracking equipment and 45 transformers. This allowed us to preserve approximately $2 billion in future investment tax credit benefit on more than 5.5 GW of projects, providing us a competitive advantage in future origination and further solidifying a future pipeline of accretive projects.
Efficiently redeploy capital into new renewable energy investments.
We monetize our operational asset value growth through the sale of minority interests and refinancings, to generate cash and we recycle capital from our operational projects to invest in new project opportunities and improved growth of our portfolio. For the years ended December 31, 2019 and 2020, and for the nine months ended September 30, 2021, we received cash proceeds from the sale of minority interests of $34.2 million, $32.0 million, and $129.4 million, respectively. Since 2016, we have completed 20 refinancings of project debt on operational assets, allowing us to accrete substantial value to our equity and generating more than $235 million of distributions
77
from the recapitalizations. In addition, we have raised, deployed, and committed funds of more than $800 million in the aggregate to date, across 25 projects, including the recent launch of a new AssetCo fund in the third quarter of 2021 with a total commitment of $118.0 million.
Significant Factors and Trends Affecting Our Business
Growth in the Renewable Energy Market
The renewable energy market represents one of the largest growth opportunities in the United States energy sector. Demand for sustainable energy continues to grow, driven primarily by the ongoing replacement cycle for aging energy infrastructure and the expanding electrification of the broader economy, creating new opportunities. See “Our Market Opportunity.” Our primary focus is utility-scale solar, which is the largest and fastest growing opportunity within the onshore renewable energy industry. Furthermore, technological advances, growing corporate and investor support for renewable energy, as well as policy incentives are accelerating growth in renewable energy production. For example, the advent of large-scale battery storage is increasing efficiency and capacity while expanding scale. Simultaneously, the costs of solar panels, components, and raw materials continue to decline in cost. Growing public demand, favorable regulatory trends, and government policy are also incentivizing development of renewable energy projects. These incentives include tax credits and abatements, depreciation deductions, grants, and rebates. These industry trends support our growth and we expect them to continue.
Access to Capital
Our future growth depends in significant part on our ability to raise capital from tax equity investors and lenders on competitive terms to help finance the development and construction of our projects. We have historically used a variety of structures including tax equity financing, construction loan financing, term loan financing, and subordinated non-recourse financing to help fund our operations. Our ability to raise capital from tax equity investors and lenders is also affected by general economic conditions, the state of the capital markets, inflation levels, and concerns about our industry or business. See “Liquidity and Capital Resources” below for further details on capital raising and the effective management of our capital structure.
Cost of Construction and Supply Chains
The declining cost of solar panels and other raw materials necessary to manufacture them has been a key driver in the growth of the renewable energy industry. The prices of solar panels and raw materials have historically declined, we expect continued technological advances, among other factors, to further drive long-term declines in price; however, prices for such items could increase in the near term future due to a variety of factors, including trade barriers, export regulations, regulatory or contractual limitations, industry market requirements, and changes in technology and industry standards. We purchase a significant portion of our projects’ solar panels and other components from manufacturers based in China, where the U.S. government has imposed certain duties on solar cells manufactured in China. Any change in the cost of solar panels or other raw materials would impact the costs of constructing our projects and affect our financial results. In addition, both global and localized events could disrupt our international supply chains. Recently, we have seen industry-wide supply shortages caused by the rapid expansion of the renewable energy market along with COVID-19-related supply disruptions. The reliability of our supply chain is an important aspect of our growth story, and as such, we will continue to actively manage our supply chain and supply relationships to minimize the impact of such shortages and disruptions to our business, financial condition, and results of operations.
Wind and Solar Resource Levels, Weather Conditions, Seasonality, and the Performance of Our Operating Projects
The energy produced and revenue and cash flows generated by a solar or wind project depend on suitable climatic conditions, particularly solar and wind conditions, both of which are beyond our control. Our solar projects require strong, consistent exposure to sunlight to achieve the predicted power generation and weather, geological, or other conditions may prevent adequate amounts of sunlight from reaching some or all of our solar projects. Our wind projects will only operate within certain wind speed ranges that vary by turbine model and manufacturer, and the wind resource at any given project site may not fall within such specifications. Seasonal trends also affect both our solar and wind projects, with energy output varying seasonally depending on the location of a specific project. We base our decisions to develop, own, and operate projects on the findings of solar or wind resource studies conducted by third-party, on-site meteorological stations, independent engineers, and our internal engineering team before starting construction which creates a “P50” expectation
78
of estimated production, which represents the base case annual energy production estimate, denoting a 50% chance it will be exceeded. We expect variability around P50 quarterly and annually. However, actual climate conditions at a project site may not conform to the findings of these studies, and, therefore, our projects may not meet or may exceed anticipated production levels, which could affect our forecasted profitability. Any of these events or conditions could harm or benefit our business, financial condition, and results of operations.
Government Regulations and Incentives
Our strategy to grow our business through the development and acquisition of renewable energy projects could be affected by certain government policies and regulations. Renewable energy projects currently benefit from various U.S. federal, state, and local governmental incentives, such as PTCs, investment tax credits, RPS programs, five-year accelerated tax depreciation under MACRS, and other incentives. These policies have had a significant positive effect on the development of renewable energy projects and the renewable energy industry in general, and they could change at any time. These incentives provide tax credits and accelerated depreciation for a significant portion of the development costs, or creating demand for renewable energy assets through RPS programs. Any loss or reduction of such incentives and other programs could result in higher operating costs, while the utilization of such incentive and other programs can help reduce certain operating costs, primarily our cost of capital.
Key Performance Metrics
Net Asset Value
Our strategy is to identify, acquire, develop, construct, and operate renewable energy projects with the goal of creating and growing long-term value over the useful life of a project. Consistent with the nature of other long-lived infrastructure assets, many of the drivers of a project’s multi-year cash flows are fixed early in its lifecycle, including PPA pricing and term, and debt financing cost and amount. We believe shareholder value is created by focusing on the aggregate cash flows over the life of a project rather than during any individual year. Consequently, our management team utilizes NAV—which represents a project’s total expected value over the course of its useful life, discounted to the measurement date—as the primary metric for investment decisions and for gauging the success of our business strategy. Our operating income in 2019, 2020, and for the nine months ended September 30, 2021 was $19.9 million, $16.8 million and $35.6 million, respectively. Primarily due to unrealized losses on derivative financial instruments, our net loss was $159.9 million and $278.1 million in 2019 and 2020, respectively. Primarily due to unrealized gains on derivative financial instruments, our net income was $146.9 million for the nine months ended September 30, 2021. We believe that unrealized mark-to-market adjustments to the fair value of our derivative assets and liabilities, which have no cash impact, do not affect the economic value of our equity, as unrealized losses on derivatives are economically offset by unrealized gains on the underlying assets and/or debt. However, under U.S. GAAP, the unrealized gains and losses on the derivatives are recognized, while assets and debt are not adjusted for the corresponding effect of offsetting unrealized gains and losses. For a discussion of certain risks related to our NAV, see “Risk Factors—General Business Risks—Our calculation of NAV is based on valuation estimates and assumptions that may not prove accurate or complete, and undue reliance should therefore not be placed on such metric by investors.”
We believe our focus on NAV and its growth is the best way to maximize value for our shareholders. While we monitor traditional income statement and cash flows metrics, NAV growth and preservation lies at the core of all of our investment decisions. For example, we actively seek long-term PPAs, often by offering a lower PPA price than we could have obtained for a shorter-term PPA. We believe that longer-term, high credit-quality contractual offtake arrangements are beneficial to our shareholders because they reduce future merchant price risk and allow us to borrow greater amounts of lower-cost project non-recourse debt, lowering our weighted average cost of capital. Similarly, we actively seek to obtain PPA terms that are favorable over the long term, including, when appropriate, starting with a below-market PPA price for power generation and incorporating annual increases to such price over the term of the PPA. As of September 30, 2021, 25% of our projects, by gross MW capacity, have contracted power price escalators in their PPAs, which represent commitments by high credit-quality counterparties to pay more revenue per unit of production in the future than they pay in the current year of their contract with us.
Given management’s focus on NAV as the primary metric for investment decisions and for gauging the success of our business strategy, and our track record of growing NAV, we believe that NAV and its growth can provide investors with a better understanding of our company’s financial position and performance and of management’s view of the approximate value of the Company’s existing assets. NAV accounts for the economic growth that has occurred with capital deployed
79
and value created, which often takes place well before the assets start generating revenue. Traditional income statement or cash flows metrics, like operating income, net income, or cash available for distribution, are limited in their ability to appropriately reflect the meaningful value of our portfolio because they do not account for the significant invested capital in, and value derived from, construction and contracted pre-construction projects, which are generally expected to achieve operational status within the next few years. This value can be substantial; for example, projects in the construction and pre-construction phases together represented approximately 4 GW of our portfolio as of September 30, 2021. By contrast, NAV provides meaningful visibility into our growth and future cash flows, and accounts for the significant value of construction and pre-construction projects, even if they have yet to generate operational revenue. Another limitation of traditional income statement or cash flow metrics is that they do not reflect the tenor or price escalation of PPAs. For example, a renewable energy project with a 15-year PPA at today’s market price may generate higher near term operating income or cash flows and, based solely on these metrics, could be perceived as more valuable than a project with a 30-year PPA with an initial PPA price below today’s market price and a small escalator. However, we believe that lower upfront prices with longer-term, contracted, high credit-quality offtake arrangements result in greater certainty of cash flows and generally create greater NAV. Furthermore, because traditional income statement or cash flow metrics focus on a specific period of operations, they do not differentiate between assets with longer useful lives and those with only a few years remaining; as discussed in the “—Key Inputs and Assumptions” section below, our assets have a 30 or 35 year useful life depending on the technology deployed.
Traditional income statement and cash flow metrics for our company are also not directly comparable to those of other public companies in the renewable energy industry, because we are the only public pure-play, integrated renewable energy IPP focused on the utility-scale market in the U.S. Unlike certain renewable energy companies in Europe, whose projects receive the vast majority of their revenue and cash flow from the sale of power that often includes feed-in-tariffs, U.S. renewable projects benefit from tax incentives that are not captured in traditional income statement metrics and do not generate operating cash flow, but rather provide after-tax value and serve as a source of cash liquidity through the tax equity financing market. Conversely, solar companies in the United States that target the retail, commercial, or industrial markets have much shorter sales cycles and, as a result, do not have business models that include significant customer contracts that are not yet operational and have yet to generate operating income.
In summary, we believe that NAV facilitates investor understanding of our financial position and performance by:
| • | Allowing investors to evaluate the growth of our business over time; |
| • | Providing investors with a metric focused on the long-term value of the Company's portfolio, as opposed to a cash flow or income statement metric, which may experience variability due to weather patterns or other factors in any given year; and |
| • | Helping investors understand what factors influence our company's overall value proposition. |
We calculate NAV by valuing all of our contracted projects and other assets and liabilities as of the end of each financial reporting period, which we refer to as the measurement date. With respect to the valuation of assets, once a project has a contracted offtake arrangement, we calculate the gross asset value component of NAV by discounting all of the projected unlevered project cash flows to the measurement date, as discussed in further detail below under “—Calculating NAV.” We then subtract from gross asset value the various forms of financing, including tax equity financing, project non-recourse debt, equity interests owned by AssetCo funds and other co-investors in our projects, subordinated non-recourse debt, and corporate level debt (net of available cash balances). The difference between gross asset value and the aggregate value of such liabilities is what we define as NAV, which belongs to our shareholders. Given the long-term nature of our projects’ development, construction, and operations, our calculation of NAV takes into account a project’s current contracts and phase in its lifecycle as well as our projections using methodology derived through our prior experience with similar projects. The following tables present our calculation of NAV as of December 31, 2019 and 2020, and September 30, 2021:
| | | As of December 31, 2019 | ||||||||||
(in millions, other than Gross MW Capacity and Net MW Capacity) | | | Total | | | Operational and Construction | | | Contracted Pre- Construction | | | Corporate and Other |
Gross asset value | ||||||||||||