UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 8-K/A

Amendment No. 1

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): June 29, 2015

 

NRG YIELD, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of
incorporation)

 

001-36002
(Commission File Number)

 

46-1777204
(IRS Employer Identification No.)

 

211 Carnegie Center, Princeton, New Jersey 08540

(Address of principal executive offices, including zip code)

 

(609) 524-4500

(Registrant’s telephone number, including area code)

 

N/A

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

o                      Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o                      Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o                      Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o                      Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 



 

Introductory Note

 

On June 29, 2015, NRG Yield, Inc. (the “Company”) acquired twenty-five percent (25%) of the membership interests in Desert Sunlight Investment Holdings, LLC, which owns two solar photovoltaic facilities that total 550 megawatts, each located in Desert Center, California (the “Desert Sunlight Acquisition”). This Current Report on Form 8-K/A (the “Form 8-K/A”) amends the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on July 6, 2015 to include the financial statements relating to the Desert Sunlight Acquisition and the pro forma financial information required by Items 9.01(a) and 9.01(b), respectively, and to include the exhibits under Item 9.01(d) of this Form 8-K/A.

 

Section 9 - Financial Statements and Exhibits

 

Item 9.01 Financial Statements and Exhibits.

 

(a) Financial Statements of Businesses Acquired.

 

The audited financial statements of Desert Sunlight Investment Holdings, LLC as of December 31, 2014 and 2013, and for each of the two years in the period ended December 31, 2014, and the unaudited financial statements of Desert Sunlight Investment Holdings, LLC as of June 30, 2015 and for the six months ended June 30, 2015 and 2014 are attached to this Form 8-K/A as Exhibits 99.1 and 99.2, respectively, and are incorporated herein by reference.

 

(b) Pro Forma Financial Information.

 

The unaudited pro forma condensed combined consolidated financial statements and explanatory notes relating to the Desert Sunlight Acquisition are attached as Exhibit 99.3 to this Form 8-K/A and are incorporated herein by reference.

 

(d) Exhibits.

 

The Exhibit Index attached to this Form 8-K/A is incorporated herein by reference.

 

2



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

NRG Yield, Inc.

 

 

 

 

 

 

 

By:

/s/ Brian E. Curci

 

 

Brian E. Curci

 

 

Corporate Secretary

 

 

Dated: September 15, 2015

 

3



 

EXHIBIT INDEX

 

Exhibit No.

 

Document

23.1

 

Consent of Deloitte & Touche LLP.

 

 

 

99.1

 

Audited consolidated financial statements of Desert Sunlight Investment Holdings, LLC as of December 31, 2014 and 2013 for each of the two years in the period ended December 31, 2014.

 

 

 

99.2

 

Unaudited consolidated financial statements of Desert Sunlight Investment Holdings, LLC as of June 30, 2015 and for the six months ended June 30, 2015 and 2014.

 

 

 

99.3

 

Unaudited pro forma combined consolidated financial statements and explanatory notes for the year ended December 31, 2014 and the six months ended June 30, 2015.

 

4


Exhibit 23.1

 

CONSENT OF INDEPENDENT AUDITORS

 

We consent to the incorporation by reference in the NRG Yield, Inc. Registration Statement Nos. 333-190071 and 333-206061 on Forms S-8 and Registration Statement Nos. 333-204589 and 333-205140 on Forms S-3 of our report dated April 30, 2015 (September 15, 2015 as to the disclosure in Note 2 to the consolidated financial statements of Desert Sunlight Investment Holdings, LLC and Subsidiaries regarding the lawsuit filed by them on July 2, 2015 seeking payment of Convertible Investment Tax Credits), relating to the consolidated financial statements of Desert Sunlight Investment Holdings, LLC and Subsidiaries for the years ended December 31, 2014 and 2013, appearing in this Current Report on Form 8-K/A of NRG Yield, Inc. dated September 15, 2015.

 

 

/s/ DELOITTE & TOUCHE LLP

Boca Raton, Florida

September 15, 2015

 


Exhibit 99.1

 

 

INDEPENDENT AUDITORS’ REPORT

Deloitte & Touche LLP

 

Certified Public Accountants

To Desert Sunlight Investment Holdings, LLC

1800 North Military Trail

700 Universe Blvd.

Suite 200

Juno Beach, Florida

Boca Raton, FL 33431-6386

 

USA

 

Tel:+ 1 561 962 7700

 

Fax: + 1 561 962 7750

 

www.deloitte.com

 

We have audited the accompanying consolidated financial statements of Desert Sunlight Investment Holdings, LLC and its subsidiaries (the “Company”), which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income (loss), members’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

 

Management’s Responsibility for the Consolidated Financial Statements

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

/s/ DELOITTE & TOUCHE LLP

 

 

Boca Raton, Florida

April 30, 2015 (September 15, 2015, as to the disclosure in Note 2 to the consolidated financial statements regarding the lawsuit filed by the Company on July 2, 2015 seeking payment of Convertible Investment Tax Credits)

 

 

Member of

 

Deloitte Touche Tohmatsu

 



 

Desert Sunlight Investment Holdings, LLC

Consolidated Balance Sheets

As of December 31, 2014 and 2013

(Thousands of Dollars)

 

 

 

December 31,

 

December 31,

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

20,913

 

$

5,226

 

Accounts receivable

 

578,147

 

340,391

 

Prepaid expenses and other current assets

 

2,102

 

2,216

 

Restricted investments

 

104,836

 

8,486

 

Total current assets

 

705,998

 

356,319

 

NON-CURRENT ASSETS

 

 

 

 

 

Property, plant and equipment, net

 

1,476,951

 

890,870

 

Construction work in progress

 

 

308,285

 

Deferred financing costs, net

 

31,545

 

41,165

 

Derivative assets

 

 

5,610

 

Other non-current assets

 

10,012

 

7,927

 

Total non-current assets

 

1,518,508

 

1,253,857

 

TOTAL ASSETS

 

$

2,224,506

 

$

1,610,176

 

 

 

 

 

 

 

LIABILITIES AND MEMBER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable and accrued expenses

 

$

21,722

 

$

234,437

 

Accrued interest

 

13,731

 

10,348

 

Current maturities of long-term debt

 

393,722

 

211,837

 

Due to related parties

 

933

 

1,719

 

Derivative liabilities

 

5,967

 

727

 

Total current liabilities

 

436,075

 

459,068

 

NON-CURRENT LIABILITIES

 

 

 

 

 

Long-term debt

 

1,116,114

 

744,000

 

Derivative liabilities

 

17,495

 

2,966

 

Asset retirement obligations

 

18,582

 

14,513

 

Other non-current liabilities

 

301

 

220

 

Total non-current liabilities

 

1,152,492

 

761,699

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

1,588,567

 

1,220,767

 

 

 

 

 

 

 

COMMITMENTS AND CONTNGENCIES (NOTE 9)

 

 

 

 

 

 

 

 

 

 

 

TOTAL MEMBER’S EQUITY

 

635,939

 

389,409

 

 

 

 

 

 

 

TOTAL LIABILITIES AND MEMBER’S EQUITY

 

$

2,224,506

 

$

1,610,176

 

 

The accompanying notes are an integral part of these financial statements.

 

1



 

Desert Sunlight Investment Holdings, LLC

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2014 and 2013

(Thousands of Dollars)

 

 

 

For the Year Ended
December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

OPERATING REVENUES

 

$

133,590

 

$

738

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

Operations and maintenance

 

19,535

 

5,201

 

Depreciation and amortization

 

39,689

 

822

 

Taxes other than income taxes and other

 

536

 

4

 

Total operating expenses

 

59,760

 

6,027

 

 

 

 

 

 

 

OPERATING INCOME (LOSS)

 

73,830

 

(5,289

)

 

 

 

 

 

 

OTHER DEDUCTIONS

 

 

 

 

 

Interest expense

 

41,442

 

3,842

 

Total other deductions

 

41,442

 

3,842

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

32,388

 

$

(9,131

)

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

Net unrealized gains / losses on cash flow hedges:

 

 

 

 

 

Effective portion of net unrealized gain (loss)

 

(26,315

)

22,267

 

Reclassification from accumulated other comprehensive income (loss) to net income (loss)

 

3,289

 

320

 

Total other comprehensive income (loss)

 

(23,026

)

22,587

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

$

9,362

 

$

13,456

 

 

The accompanying notes are an integral part of these financial statements.

 

2



 

Desert Sunlight Investment Holdings, LLC

Consolidated Statements of Members’ Equity

For the years ended December 31, 2014 and 2013

(Thousands of Dollars)

 

 

 

Contributed Capital
and Retained
Earnings

 

Accumulated Other
Comprehensive
Income (Loss)

 

Members’ Equity

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2012

 

$

203,399

 

$

(75,491

)

$

127,908

 

 

 

 

 

 

 

 

 

Member contributions

 

248,045

 

 

248,045

 

Other comprehensive income

 

 

22,587

 

22,587

 

Net loss

 

(9,131

)

 

(9,131

)

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2013

 

$

442,313

 

$

(52,904

)

$

389,409

 

 

 

 

 

 

 

 

 

Member contributions

 

237,168

 

 

237,168

 

Other comprehensive loss

 

 

(23,026

)

(23,026

)

Net income

 

32,388

 

 

32,388

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2014

 

$

711,869

 

$

(75,930

)

$

635,939

 

 

As detailed in Note 1 to these consolidated financial statements:

 

The NextEra member is the holder of all Desert Sunlight Investment Holdings LLC’s Class A equity shares.  The Class A shares comprise a 50% share of the Company’s total equity.

 

The GECC member and Sumitomo member are the holders of Desert Sunlight Investment Holdings LLC’s Class B equity shares.  The Class B shares comprise 50% of the Company’s total equity.

 

The accompanying notes are an integral part of these financial statements.

 

3



 

Desert Sunlight Investment Holdings, LLC

Consolidated Statements of Cash Flows

For the years ended December 31, 2014 and 2013

(Thousands of Dollars)

 

 

 

For the year
ended
December 31, 2014

 

For the year
ended
December 31, 2013

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income (loss)

 

$

32,388

 

$

(9,131

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) in operating activities:

 

 

 

 

 

Amortization of debt issuance costs

 

8,083

 

49

 

Depreciation and amortization

 

39,689

 

822

 

Mark to market for deravitives and amortization of derivatives

 

2,353

 

126

 

Changes in assets:

 

 

 

 

 

Accounts receivable

 

(7,344

)

(738

)

Prepaid expenses and other current assets

 

114

 

717

 

Other non-current assets

 

(2,085

)

(2,074

)

Changes in liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

3,846

 

899

 

Accrued interest

 

10,702

 

(500

)

Due to related parties

 

(786

)

1,719

 

Other non-current liabilities

 

81

 

90

 

NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

87,041

 

(8,021

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(765,060

)

(694,702

)

Restricted investments

 

(96,350

)

305,960

 

NET CASH FLOW USED IN INVESTING ACTIVITIES

 

(861,410

)

(388,742

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Debt issuance

 

554,000

 

153,600

 

Member contributions

 

237,168

 

248,045

 

Financing costs

 

(1,112

)

(2,999

)

NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES

 

790,056

 

398,646

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

15,687

 

1,883

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, Beginning of Period

 

5,226

 

3,343

 

CASH AND CASH EQUIVALENTS, End of Period

 

$

20,913

 

$

5,226

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW INFORMATION

 

 

 

 

 

Cash paid for interest, net of capitalized interest

 

$

19,183

 

$

4,302

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:

 

 

 

 

 

Plant, property and equipment, net, included in accounts payable and accrued expenses

 

$

15,862

 

$

 

Construction in progress included in accounts payable and accrued expenses, other non-current liabilities, due to related parties and accrued interest

 

$

 

$

198,293

 

Reductions to property, plant, and equipment, net, via accounts receivable for convertible investment tax credits (“CITC”) / test revenues

 

$

570,064

 

$

339,652

 

Contribution of prepaid expenses and other current assets from member

 

$

 

$

1,942

 

Additions to property, plant and equipment, net for ARO

 

$

18,582

 

$

14,512

 

 

The accompanying notes are an integral part of these financial statements.

 

4



 

Desert Sunlight Investment Holdings, LLC

NOTES TO FINANCIAL STATEMENTS

As of and for the years ended December 31, 2014 and 2013

 

1                                         Organization

 

Desert Sunlight Investment Holdings, LLC (the “Company”), a Delaware limited liability company, was formed on September 8, 2011 for the purpose of holding a 100% interest in Desert Sunlight Holdings, LLC (“Holdings”), a Delaware limited liability company which was formed on December 15, 2009 for the purpose of holding a 100% interest in Desert Sunlight 250, LLC (“Sunlight 250”) and Desert Sunlight 300, LLC (“Sunlight 300”), (collectively the “Projects”). The Company, Holdings, Sunlight 250, and Sunlight 300 are collectively referred to as the “Company and its subsidiaries.”  Holdings and the Projects were created to develop, finance, construct, own and operate 550 megawatts (“MW”) of alternating current (“AC”) solar photovoltaic (“PV”) electric generating facilities, including an approximately 12-mile long generation-tie line, certain monitoring and maintenance infrastructure and other ancillary facilities (the “Shared Facilities”) located on approximately 4,000 acres of land in the Chuckwalla Valley, which is approximately six miles north of Desert Center, California.  The Projects consist of two solar electric generating facilities, with a nominal net output of 250 MW and 300 MW, respectively.

 

NextEra Desert Sunlight Holdings, LLC, a Delaware limited liability company (the “NextEra Member”), is the initial Class A Member and the initial Managing Member, and EFS Desert Sun, LLC, a Delaware limited liability company (the “GECC Member”) is the initial Class B Member of Holdings.  First Solar Development, Inc., NextEra Member and GECC Member are parties to a Membership Interest Purchase and Sale Agreement, dated September 29, 2011 (the “MIPSA”) pursuant to which NextEra and GECC Members each separately agreed, among other things, to purchase from First Solar Development, Inc. fifty percent of the membership interests in Holdings.  NextEra and GECC Members each contributed their fifty percent share of the membership interests in Holdings to the Company in exchange for a fifty percent share of the membership interests in the Company for which NextEra and GECC Members have equal rights. On September 27, 2012, the GECC member sold 50% of its Class B shares (25% of total equity) to Sumitomo Corporation of America (the “Sumitomo Sponsor”) and Sumitomo Solar Desert Sunlight, LLC, a Delaware limited liability company (the “Sumitomo Member”).  As a result, NextEra, GECC and Sumitomo Members are collectively the “Members” of the Company.

 

The NextEra Member is an affiliate of ESI Energy, LLC which is a wholly-owned subsidiary of NextEra Energy Resources, LLC (“NextEra”), which is a wholly-owned subsidiary of NextEra Energy, Inc., a New York Stock Exchange company.  The GECC Member is an affiliate of GE Energy Financial Services, which is an affiliate of GE Capital Corporation, a New York Stock Exchange company. The Sumitomo Member is an affiliate of the Sumitomo Sponsor, which is an indirect subsidiary of the Sumitomo Corporation of Japan, a Tokyo Stock Exchange company.

 

The Projects employ AC PV technology and utilizes First Solar Inc.’s (“First Solar”) PV modules, which are a technology currently in commercial use in numerous utility-scale and other projects located in multiple countries.  These modules convert sunlight to electricity.  The direct current electricity generated by the modules are converted to alternating current using inverters.  The Projects were constructed and are operated by an affiliate of First Solar.

 

During December of 2013, the Projects achieved partial commercial operations, including turnover of 10 of its approximately 20 blocks, generation of initial operating revenues, and placing its shared facilities in service.  All remaining capacity was placed in service in 2014, with the final Blocks achieving their commercial operation dates (“COD”) in the fourth quarter of 2014.

 

The Members share profits and losses and cash flows in proportion to their ownership percentage interests.

 

5



 

2                                         Significant Accounting Policies

 

Basis of Presentation — The accompanying consolidated financial statements of the Company include the accounts of the Company and its subsidiaries.  All material intercompany balances and transactions have been eliminated in consolidation.  The footnotes to the financial statements presented herein provide the requisite information for the Company.

 

Reclassification — Certain amounts included in prior year’s financial statements have been reclassified to conform to the current year’s presentation.

 

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents — Cash and cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less.

 

Restricted Investments — Restricted investments at the Projects consist of a money market fund held in trust accounts in accordance with the provisions of the debt agreements (see Note 6 - Long-term Debt).  The value of these assets is based upon the fund’s published net asset value at the reporting date.

 

Accounts Receivable and Revenue Recognition — The Projects entered into two long-term power purchase agreements with Southern California Edison (“SCE”) and Pacific Gas & Electric Company (“PG&E”), (collectively, the “PPAs”).  Sunlight 250 entered into an agreement with SCE in August 2009 (the “SCE PPA”) for a term of approximately 20 years, commencing upon COD.  Under the SCE PPA, Sunlight 250 will provide all of the electricity produced to SCE.  Sunlight 300 entered into an agreement with PG&E in February 2010 (the “PG&E PPA”) for a term of approximately 25 years, commencing upon COD. Under the PG&E PPA, Sunlight 300 will provide all of the electricity produced to PG&E.  The PPAs are accounted for as operating leases.  Due to the fact that payments under the PPAs are based on actual generation, the payments are considered contingent rental income; therefore, revenue from power generation is recognized as income during the period electricity is produced and delivered.   Trade accounts receivable as of December 31, 2014 and 2013 related to the PPAs were approximately $8.2 million and $8.7 million, respectively.  If these customer receivable balances should be deemed uncollectible, this would have a material effect on the Company’s results of operations and financial condition. Management does not believe significant credit risk exists as of December 31, 2014.   Accounts receivable balances would be adjusted for any write-offs and any estimated allowance for doubtful accounts, which is reviewed periodically based on amounts past due and significance. There was no allowance for doubtful accounts recorded as of December 31, 2014 and 2013.

 

Accounts receivable is also comprised of Convertible Investment Tax Credits (“CITC”) in connection with renewable energy grants. As of December 31, 2014 and 2013, accounts receivable arising from CITCs were $570.0 million and $331.6 million, respectively.  See Note 3 — Property, Plant and Equipment, net. On May 1, 2015, the Company received $360.4 million in renewable energy grant proceeds leaving a remaining balance of $209.6 million of accounts receivable arising from CITCs. On July 2, 2015, the Desert Sunlight project companies filed a lawsuit in the U.S. District Court for the District of Columbia seeking a judicial order mandating immediate payment of the remaining balance of grant proceeds sought by the Company. The lawsuit is pending.

 

In May 2014, the Financial Accounting Standards Board issued a new accounting standard which provides guidance on the recognition of revenue from contracts with customers and requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows from an entity’s contracts with customers. Nonpublic entities are required to adopt the new standard for fiscal year beginning after December 15, 2017 with early adoption allowed as early as the fiscal year beginning after December 15, 2016.  The Company is currently evaluating the effect the adoption of this standard will have, if any, on its financial statements.

 

Property, Plant and Equipment, net — Property, plant and equipment consists primarily of development, engineering and construction costs related to the Company’s power generation facilities, the substations and transmission lines. Property, plant and equipment is recorded at cost and depreciated on a straight-line basis over their estimated useful lives ranging from 3 to 30 years, commencing on the date the assets are placed in service.

 

6



 

The American Recovery and Reinvestment Act of 2009 provided for an option to elect a cash grant for certain renewable energy property in lieu of tax credits. As of December 31, 2014 and 2013, CITC of approximately $570.0 million and $331.6 million, respectively, is recorded as a reduction to property, plant and equipment.  CITC is amortized as a reduction to depreciation expense over the estimated life of the related property.

 

Construction Work in Progress — Construction work in progress consists primarily of development, engineering and construction costs related to the Projects’ power generation facilities. Construction work in progress is recorded at a combination of actual cost and a pro rata share of common area costs which are allocated based on the respective MWs and was transferred into Property, Plant, and Equipment, net, upon commissioning.  Included within construction in progress as of December 31, 2013 was approximately $17.7 million of capitalized interest expense.  All construction work in progress was transferred into Property, Plant, and Equipment, net in 2014.

 

Capitalized Interest is also a reduction to net interest expense.  In the years ended December 31, 2014 and 2013, capitalized interest was approximately $8.9 million and $32.9 million, respectively.

 

Impairment of Long-Lived Assets — The Company and its subsidiaries evaluate on an ongoing basis, the recoverability of their long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  As of December 31, 2014 and 2013, the Company and its subsidiaries concluded no impairment adjustments were necessary.

 

Asset Retirement Obligation — Asset retirement obligations are those for which a legal obligation exists under the laws, statutes, and written or oral contracts, including obligations arising under the doctrine of promissory estoppel, and for which the timing or method of settlement may be conditioned on a future event.

 

The Company and its subsidiaries account for asset retirement obligations and conditional asset retirement obligations (collectively, “ARO”) in accordance with GAAP which requires that requires that a liability for the fair value of an ARO be recognized in the period in which it is incurred if it can be reasonably estimated, with the offsetting associated asset retirement costs capitalized as part of the carrying amounts of the long-lived asset.  The asset retirement costs is subsequently allocated to expense using a systematic and rational method over the asset’s estimated useful life.  Changes in the ARO resulting from the passage of time are recognized as an increase in the carrying amount of the liability and as accretion expense, which is included in the depreciation and amortization expense in the Company’s consolidated statements of comprehensive income.   Changes resulting from revisions to the timing or amount of the original estimate of cash flows are recognized as an increase or a decrease in the asset retirement cost, or income when the asset retirement cost is depleted.

 

A rollforward of the Company’s AROs is as follows (in thousands):

 

Balance at December 31, 2012

 

$

 

 

 

 

 

Additions

 

14,190

 

Accretion expense

 

322

 

 

 

 

 

Balance at December 31, 2013

 

$

14,512

 

 

 

 

 

Additions

 

3,223

 

Accretion expense

 

847

 

 

 

 

 

Balance at December 31, 2014

 

$

18,582

 

 

Income Taxes —As limited liability companies, the Company and its subsidiaries are not taxable for federal and state income tax purposes. As such, no provision has been made for income taxes since such taxes, if any, are the responsibility of their members.

 

7



 

Fair Value of Financial Instruments — The carrying amount of accounts receivable, and accounts payable and accrued expenses, approximate fair value due to the short maturity of these instruments. The fair value of the A-1 Loans outstanding (See Note 6 — Long-term Debt) at December 31, 2014 and 2013 were $803.0 million and $739.3 million, respectively and was estimated based on the borrowing rates as of the balance sheet date for similar issues of debt with similar remaining maturities.  The book value of the Lock Loans and A-3 Loans outstanding (See Note 6 — Long-term Debt) at December 31, 2014 and 2013 approximates their fair values due to the short maturity of the debts.  The book value of the A-2 Loans approximate their fair values because their stated interest rate resets are tied to the prevailing London Interbank Offered (“LIBO”) rates.

 

Fair Value Measurements — The Company uses a valuation technique to measure the fair value of assets and liabilities relying primarily on a discounted cash flow model using observable inputs (LIBO, risk free discount factor).   The Company’s assessment of the significance of any particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.   Please see further disclosure within Note 7 — Fair Value Measurements.

 

Accounting for Derivative Instruments and Hedging Activities - Derivative instruments are recorded on the Company and its subsidiaries balance sheets and measured at fair value.  In connection with the debt financings, the Company and its subsidiaries entered into derivative instruments (interest rate swap agreements and treasury rate locks) to manage the interest rate cash flow risk related to the expected future debt financing.  Both agreements are considered derivatives that qualify for cash flow hedge accounting.  Under the interest rate swap agreements (the “Swaps”), the Company pays a fixed rate of interest and receive a floating rate of interest over the term of the agreements without the exchange of the underlying notional amounts.  These agreements allow the Company to offset the variability of the forecasted floating rate loan interest with the variable interest payments due on the interest rate swaps. These derivatives were not designated as cash flow hedges at the project level but were designated during consolidation at Holdings. The treasury locks recorded at the Company were used to hedge the interest rate risk of forecasted fixed rate debt issuances until the debt was drawn upon, at which point it was priced (the “Locks”).

 

The changes in gains or losses on the interest rate swaps are reported in the projects’ statements of operations as derivative gains or losses since cash flow hedge accounting is not applied. Cash flows related to interest rate swaps designated as hedges are included within cash flow from operations in the statement of cash flows.  The effective portion of the gains or losses on these derivative instruments is reported initially as a component of other comprehensive income, and subsequently reclassified into earnings when the forecasted or actual interest payments impact earnings.  Additionally, any ineffective portion of the gain or loss is reported immediately in current earnings as a component of interest expense in the statement of comprehensive income (See Note 7 - Fair Value Measurements and Note 8 - Derivative Instruments and Hedging Activity).

 

Deferred Financing Costs - Deferred financing costs include upfront fees and costs incurred to obtain long-term debt and commitment fees on undrawn debt and are amortized over the life of the related debt using the effective interest rate established at debt issuance. Deferred financing costs as of December 31, 2014 and 2013 are approximately $45.3 million and $44.6 million, respectively, in connection with the debt financings as described in Note 6 - Long-term Debt.  Accumulated amortization at December 31, 2014 and 2013 was approximately $13.7 million and $3.4 million, respectively, and reflected on the accompanying balance sheets for each entity.  The Company recorded deferred financing costs amortization expense for the years ended December 31, 2014 and 2013 of approximately $10.3 million and $2.6 million, respectively.

 

In 2015, the FASB issued a new accounting standard which provides guidance on the presentation of debt issuance costs and requires that debt issuance costs related to a recognized debt liability be presented as a direct reduction from the carrying amount of that debt liability.  The standard is effective for the Company beginning January 1, 2016.  The company is currently evaluating the effect the adoption of this standard will have, if any, on its financial statements.

 

Subsequent Events - The Company has evaluated subsequent events through April 30, 2015, which is the date the financial statements were available to be issued.  On the evening of April 21, 2015 a F0 class tornado touched down on the Northwest portion of the project.  The tornado caused panel damage at Sunlight 300 and Sunlight 250 in the areas where it touched down that resulted in a temporary derate of approximately 6

 

8



 

MW.  The initial estimates are that approximately 0.6% of the panels on site were impacted by the storm.  The project has been able to reach its max generation on a daily basis since the storm, but the derate has resulted in a slower ramp up and quicker ramp down periods. The expectation is to have the project fully restored by mid-July.   The repairs will be covered by the property insurance policy which has a $500,000 deductible. The Company has updated its evaluation of subsequent events for disclosure purposes through September 15, 2015, which is the date the financial statements were available to be reissued. As discussed above, on July 2, 2015, the Desert Sunlight project companies filed a lawsuit in the U.S. District Court for the District of Columbia seeking a judicial order mandating immediate payment of $209.6 million of grant proceeds related to CITCs. The lawsuit is pending.

 

3                                         Property, Plant, and Equipment, Net

 

Property, plant and equipment consists of the following as of December 31, 2014 and 2013 (in thousands):

 

 

 

Useful Life
(in years)

 

2014

 

 

 

 

 

 

 

Power generation assets

 

30

 

$

2,006,111

 

Convertible investment tax credit

 

30

 

(569,944

)

Capitalized interest

 

30

 

53,606

 

Other depreciable assets

 

3 - 30

 

26,193

 

 

 

 

 

1,515,966

 

Less: accumulated depreciation and amortization

 

 

 

(39,015

)

Property, plant and equipment, net

 

 

 

$

1,476,951

 

 

 

 

Useful Life
(in years)

 

2013

 

 

 

 

 

 

 

Power generation assets

 

30

 

$

1,180,665

 

Convertible investment tax credit

 

30

 

(331,625

)

Capitalized interest

 

30

 

27,467

 

Other depreciable assets

 

3 - 30

 

14,862

 

 

 

 

 

891,369

 

Less: accumulated depreciation and amortization

 

 

 

(499

)

Property, plant and equipment, net

 

 

 

$

890,870

 

 

Depreciation expense for the years ended December 31, 2014 and 2013 was approximately $54.0 million and $0.6 million, respectively.  In the years ended December 31, 2014 and 2013 depreciation expense was offset by amortization expense for CITC by approximately $14.3 million and $0.2 million, respectively.

 

4                                         Related Party Transactions

 

Affiliates of the Company and its subsidiaries, which are direct and indirect wholly-owned subsidiaries of NextEra, make purchases and payments from time to time on behalf of the Projects as prescribed by various agreements.  The amounts due to related parties are non-interest bearing, do not have any stated terms, and are generally payable within 45 days.  Amounts due to related parties at December 31, 2014 and 2013 were $0.9 million and $1.7 million, respectively.

 

Administrative Services Agreement

 

NextEra and the Company’s subsidiaries have entered into an administrative services agreement on September 29, 2011 (the “Administrative Services Agreement”).  The Administrative Services Agreement appoints NextEra as the manager of Holdings which requires that the manager perform functions which include, but are not

 

9



 

limited to, monitoring operations and maintenance of Holdings, collecting amounts due to and using funds of the Projects to pay costs, expenses and obligations with respect to the Holdings and keeping and providing reports on the books and records of Holdings as required by the Shared Facilities Agreement (see Note 9 — Commitments and Contingencies) and the right-of-way administrative services agreements.   The term of the Administrative Services Agreement is twenty-five years with automatic extensions for an additional five year period with written notification.  Sunlight 250 and Sunlight 300 will pay $350,000 and $250,000, respectively, annually for the services under this agreement and NextEra will be reimbursed for certain out-of-pocket expenses as specified in the agreement.  Commencing in 2013, the annual fee will increase annually by an inflation factor.  For the years ended December 31, 2014 and 2013 approximately $623,000 and $611,000, respectively, was reflected as a component of operations and maintenance expense in the accompanying consolidated statements of income and statements of operations.

 

Guarantees by Members

 

The Members have entered into equity contribution agreements pursuant to which such Members are required to make certain proportionate additional capital contributions to the Company resulting in additional Class A and Class B Units, respectively. In addition, guarantors of the Members each have entered into equity guaranty agreements pursuant to which such guarantors will, upon the terms and conditions set forth therein, guarantee the payment of certain of the obligations of the Projects to make payments to First Solar under engineering and procurement contracts.  Aside from their ownership interest, these guarantees and the resulting cash contributions to the Company are the primary extent of their related party relationships.

 

5                                         Power Purchase Agreements

 

The PPAs provide for the sale to SCE and PG&E on an “as available” basis, of all electricity produced by Sunlight 250 and Sunlight 300, respectively, net of all auxiliary loads, station use and electrical losses, together with all capacity attributes, renewable energy credits, environmental attributes and resource adequacy benefits. The term of the PPAs commences upon satisfaction of certain customary conditions precedent and delivery to SCE and PG&E of energy and capacity after each COD. The term continues for approximately 20 years on the SCE PPA and approximately 25 years on the PG&E PPA.  While partial commercial operations were been achieved at both Projects in 2013, the term of the Projects’ PPA agreements do not commence until full commercial delivery, which was achieved on December 17, 2014 for both Projects.

 

The contract price under the SCE PPA is based on the timing of the initial Blocks coming online and the amount of the Projects’ share of network upgrade costs.  If Sunlight 250’s output falls below specified production levels under the SCE PPA, it would be required to cure the deficiency by paying liquidated damages for the undelivered amounts.

 

The base contract price under the PG&E PPA is fixed and does not provide for escalation but may be adjusted depending on the cost of interconnection to the project and network upgrade costs.  If Sunlight 300’s output falls below specified production levels under the PG&E PPA, it would be required to cure the deficiency by paying liquidated damages for the undelivered amounts.

 

At December 31, 2014 and 2013, there is $8.6 million and $7.9 million, respectively, of upfront and ongoing commitment fees incurred related to letters of credit associated with the PPAs reflected in Other Non-Current Assets in the related balance sheets.  These fees will be amortized over the related PPA terms commencing on COD.  For the year ended December 31, 2014, amortization of these capital commitment fees was approximately $0.2 million.

 

6                                         Long-term Debt

 

The Projects’ approximately $2.3 billion capital cost is being funded with a combination of Member equity contributions and debt.  Prior to the completion of the Projects, the costs are being funded pro-rata by debt and equity proceeds in order to maintain the target debt capitalization ratio of approximately 65%.  The Company through its subsidiaries, Sunlight 250 and Sunlight 300 each entered into three distinct tranches of debt.  Any

 

10



 

member contributions, revenues, or property of the Sunlight 300, or Sunlight 250 may be treated as collateral security for loan obligations.

 

The A-1 Loans

 

The A-1 loan agreements represent securities in an offering in trust pass-through certificates issued by the A-1 lender pursuant to a trust agreement (“A-1 Loans”). The A-1 lender utilized the full proceeds of the offering to fund the A-1 Loans to each of Sunlight 300 and Sunlight 250 pursuant to the A-1 Loan agreements under two separate loan agreements (the “A-1 Loan Agreements”).  The Department of Energy (“DOE”) guaranteed 80% of the principal amount and regularly scheduled interest on each of the A-1 Loans.  Any payment made by the DOE under the guarantee will be allocated by the A-1 lender to first pay the accrued regularly scheduled interest and principal amortization due on the guaranteed portion of the A-1 loans and any remaining amounts to the non-guaranteed portion of the A-1 Loans.  The A-1 Loans have a final maturity of October 7, 2036 and an average life of 17.7 years.  The A-1 Loans were funded in three draws of $260.4 million, $186.0 million, and $297.6 million on September 29, 2011, February 1, 2012 and August 1, 2012, respectively.  The A-1 Loans will indirectly benefit, on a pass-through basis, from a finance security package which consists of Holdings’ equity interest in the Projects and substantially all of the existing and future tangible and intangible assets of the Projects, including an undivided ownership interest in and right to use the Shared Facilities.  The A-1 Loans may be prepaid at any time, in whole, or in part, subject to a make-whole premium of 0.50% over the applicable U.S treasury rate.  At December 31, 2014 and 2013, amounts outstanding under the A-1 Loans were $744.0 million.  Principal payments on the A-1 Loans commence in 2015.  Interest for the borrowings is accrued monthly based on a weighted average rate of 3.506% on the guaranteed portion and 5.486% on the non-guaranteed portion the A-1 Loans, applied to the outstanding principal due under the A-1 Loans.

 

Years Ending
December 31,

 

A-1 Loan Payments

 

 

 

 

 

2015

 

23,396

 

2016

 

20,131

 

2017

 

20,750

 

2018

 

21,139

 

2019

 

21,660

 

Thereafter

 

636,924

 

 

 

$

744,000

 

 

The A-2 Loans

 

The A-2 lender has used two tranches of loan participations.  The A-2 lender has utilized the full proceeds of the sale of the loan participations to fund a loan to each of Sunlight 300 and Sunlight 250 (the “A-2 Loans”) pursuant to two separate loan agreements (the “A-2 Loan Agreements”).  The DOE guaranteed 80% of the principal amount and regularly scheduled interest on each of the A-2 Loans.  Any payment made by the DOE under the guarantee will be allocated by the A-2 lender to first pay the accrued regularly scheduled interest and principal amortization due on the guaranteed portion of the A-2 loans and any remaining amounts to the non-guaranteed portion of the A-2 Loans.  This loan utilizes floating rate term debt and will have a final maturity of October 7, 2026 and an expected average life of 10.5 years.  The A-2 Loans were funded, subject to satisfaction of certain conditions precedent, as needed for construction of the Projects no more frequently than once per month. Holdings has entered into interest rate hedge transactions for at least 90% of the principal amount of the A-2 Loans which will remain in place as long as the A-2 Loans are outstanding. The notional amounts of the hedges shall be reduced on an ongoing basis in accordance with the A-2 Loan amortization schedules.  The A-2 Loans were first drawn on March 28, 2014.  At December 31, 2014, the amounts outstanding under the A-2 Loans were $415.6 million.  At December 31, 2013, there were no amounts outstanding under the A-2 Loans.  Interest on the A-2 Loan draws were priced at the date of each respective draw and are repriced on each quarterly date based on the London Interbank Offered (“LIBO”) rate on the draw date in addition to a 1.01% credit spread on the guaranteed portion of the A-2 Loans and 2.25% on the non-guaranteed portion of the A-2 Loans.  In addition, there will be a step-up in the rate ranging from 0% to 0.15% over the debt term.

 

11



 

Years Ending
December 31,

 

A-2 Loan Payments

 

 

 

 

 

2015

 

20,090

 

2016

 

19,676

 

2017

 

20,281

 

2018

 

20,663

 

2019

 

21,174

 

Thereafter

 

313,716

 

 

 

$

415,600

 

 

The A-3 Loans

 

The A-3 lender has used two tranches of loan participations.  The A-3 lender has utilized the full proceeds of the sale of the loan participations to fund a loan to each of Sunlight 300 and Sunlight 250 (the “A-3 Loans”) pursuant to two separate loan agreements (the “A-3 Loan Agreements”).  The DOE has guaranteed 80% of the principal amount of and regularly scheduled interest on each of the A-3 Loans.  Any payment made by the DOE under the guarantee will be allocated by the A-3 lender to pay the accrued regularly scheduled interest and principal amortization due on the guaranteed portion of the A-3 loans.  The A-3 Loans were funded, subject to satisfaction of certain conditions precedent, as needed for construction of the Projects, but no more frequently than once per month.  The A-3 Loans will be required to be repaid in installments as proceeds are received from cash grant proceeds to be received under the Section 1603 Cash Grant in lieu of tax credits as provided for by the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) from the United States Treasury (“the Treasury”).  Holdings has entered into interest rate hedge transactions for at least 75% of the anticipated principal amount of the A-3 Loans.  The A-3 Loans were first drawn on August 1, 2013.  At December 31, 2014 and 2013, there was $292 million outstanding and $153.6 million outstanding, respectively.  Interest on the A-3 Loan draws will be priced at the date of each respective draw and repriced on each quarterly date, based on the LIBO rate on the draw date in addition to a 0.97% credit spread on the guaranteed portion of the A-3 Loans and 2.25% on the non-guaranteed portion of the A-3 Loans.  During the period of time where the A-3 Loans are committed but not fully drawn, the Projects have incurred a commitment fee of 0.41% on the undrawn balance.

 

The Lock Loans

 

In October of 2011, the Company entered into the Locks to fix the treasury component of coupons associated with the future fixed rate borrowings on the A-1 Loans as noted above.  The combined treasury lock notional amounts are $435 million and the Locks settled in February and August of 2012 when the associated A-1 Loans were drawn upon. The Locks settled for $58.2 million and the Company entered into a loan with the Lock counterparties for the settlement amount (the “Lock Loans”).  The Lock Loans accrue interest at a rate of LIBO plus 3.25% and will be repaid in installments as proceeds are received from the cash grant proceeds to be received under the Section 1603 Cash Grant in lieu of tax credits pursuant to the Recovery Act.

 

The Company has approximately $570.0 million in CITC grant receivables from the Treasury.  These cash grant proceeds have been applied for in various applications through December 2014.  To date, the Company has not received payment from the Treasury for any of the applications and has been in discussions to resolve questions from the Treasury about the qualifying expenditures.  The A-3 Loans and Lock Loans were issued with scheduled principal repayments in October 2015 that were intended to be repaid in full with cash grant proceeds; however, the principal repayments are due regardless of whether the Treasury has remitted the cash grants to the Company.

 

7                                         Fair Value Measurements

 

The Company and its subsidiaries use several valuation techniques to measure the fair value of assets and liabilities, relying primarily on the income approach of using prices and other market information for identical and/or comparable assets and liabilities for those assets and liabilities that are measured on a recurring basis.  Certain

 

12



 

derivatives and financial instruments may be valued by taking into consideration multiple inputs, including interest rate swap and LIBO rates and treasury yields, as well as counterparty credit ratings and credit enhancements.  Additionally, when observable market data is not sufficient, valuation models are developed that incorporate the Company’s proprietary views of market factors and conditions. The Company’s assessment of the significance of any particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

 

Cash Equivalents — The fair value of money market funds is calculated using current market prices.

 

Interest Rate Swaps — The Company estimates the fair value of its derivatives using a discounted cash flows valuation technique based on the net amount of estimated future cash inflows and outflows related to the swap agreements. The primary inputs used in the fair value measurements include the contractual terms of the derivative agreements, current interest rates and credit spreads. The significant inputs for the resulting fair value measurement are market-observable inputs and the measurements are reported as Level 2 in the fair value hierarchy.

 

The interest rate swap assets (liabilities) and the money market funds held are reported at fair value on a recurring basis. Fair values by hierarchy level are as follows (in thousands):

 

 

 

As of December 31, 2014

 

 

 

Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)

 

Significant
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

 

(23,462

)

 

(23,462

)

 

 

 

 

 

 

 

 

 

 

Cash Equivalents

 

 

 

 

 

 

 

 

 

Money Market Funds

 

17,348

 

 

 

17,348

 

 

 

 

 

 

 

 

 

 

 

Restricted Investments

 

 

 

 

 

 

 

 

 

Money Market Funds

 

104,837

 

 

 

104,837

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

122,185

 

$

(23,462

)

$

 

$

98,723

 

 

13



 

 

 

As of December 31, 2013

 

 

 

Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)

 

Significant
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

 

 

 

 

 

 

 

 

 

 

Derivative assets:

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

 

$

5,610

 

$

 

$

5,610

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

 

(3,693

)

 

(3,693

)

 

 

 

 

 

 

 

 

 

 

Cash Equivalents

 

 

 

 

 

 

 

 

 

Money Market Funds

 

3,918

 

 

 

3,918

 

 

 

 

 

 

 

 

 

 

 

Restricted Investments

 

 

 

 

 

 

 

 

 

Money Market Funds

 

8,486

 

 

 

8,486

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

12,404

 

$

1,917

 

$

 

$

14,321

 

 

8                                         Derivative Instruments and Hedging Activity

 

Treasury Lock and Interest Rate Swap Agreements

 

In October of 2011, the Company entered into the Locks to fix the treasury component of coupons associated with the future fixed rate borrowings on the A-1 Loans, and interest rate swap agreements to fix the LIBO rate component of the interest rate of the future borrowings of the A-2 and A-3 loans, which will be drawn, as needed, for certain expenditures incurred during construction (See Note 6 — Long-term Debt).  The combined Lock notional amounts were $435.0 million.  In February and August 2012, the Locks settled for $58.2 million and the Company entered into the Lock Loans for the settlement amount (See Note 6 — Long-term Debt).  During 2015, approximately $2.6 million is expected to be reclassified out of accumulated other comprehensive income to interest expense for the Locks. This assumes no change in interest rates.

 

The interest rate swaps have effective dates that started in July 2013.  The maximum total notional amounts for these swaps outstanding at any point in time will be $382.5 million at July 7, 2015.  The last of these swaps will mature in October 2026.  The notional amount of the interest rate swaps at December 31, 2014 and 2013 was $211.1 million and $84.7 million, respectively. During 2015, approximately $5.3 million is expected to be reclassified out of accumulated other comprehensive income to interest expense for the interest rate swaps.  This assumes no change in interest rates.

 

The interest rate swap agreements are derivatives and qualify for hedge accounting.  The fair value of the Company and its subsidiaries derivative instruments are included in their respective consolidated balance sheets as follows (in thousands):

 

14



 

 

 

December 31, 2014

 

December 31, 2013

 

Interest rate swaps:

 

 

 

 

 

Non-current assets

 

$

 

$

5,610

 

Current liabilities

 

(5,967

)

(727

)

Non-current liabilities

 

(17,495

)

(2,966

)

Total derivative assets (liabilities)

 

$

(23,462

)

$

1,917

 

 

Gains (losses) related to the Company’s cash flow hedges are recoded in their statements of comprehensive income as follows (in thousands):

 

 

 

Year Ended

 

Year Ended

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

 

 

 

 

Gains (losses) recognized in OCI

 

$

(26,315

)

$

22,267

 

Gains (losses) reclassified from AOCI to net income (a)

 

(3,289

)

(320

)

 


(a) included in interest expense

 

 

 

 

 

 

9                                         Commitments and Contingencies

 

Engineering and Procurement Contracts

 

On September 29, 2011, the Company, through its subsidiaries, Sunlight 250 and Sunlight 300, each entered into an engineering and procurement contract (“EPC”) and a common facilities engineering procurement contract with First Solar, (collectively, the “EPC Contracts”).  The EPC Contracts were entered into for the purpose of engaging First Solar to design, engineer and construct the Projects.

 

The contract price is a fixed sum determined by the EPC Contracts price but may be adjusted for circumstances beyond First Solar’s control.  The contract price has been paid incrementally upon the achievement of milestones and upon final completion, as defined in the EPC Contracts, a final payment will be made to First Solar.  The Projects were retaining an amount equal to approximately 10% of each milestone payment as performance security for First Solar’s obligation to perform the work under the EPC Contracts. The majority of these amounts were paid in 2014.   As of December 31, 2014 and 2013, approximately $6.8 million and $128.4 million, respectively, were reflected in accounts payable and accrued expenses and other non-current liabilities on the accompanying balance sheets associated with the retainage of the performance security.  First Solar has received bonuses for the turnover of Blocks is achieved prior to the projected turnover date for such Block and such bonus will not be subject to any retainage.  If First Solar fails to perform as prescribed by the EPC Contracts during construction, the Projects may be entitled to liquidated damages.

 

Operations and Maintenance Agreements

 

On September 29, 2011, the Company, through its subsidiaries, Sunlight 250 and Sunlight 300 entered into three operations and management agreements (“O&M Agreements”) with First Solar ranging from 20 to 25 years in duration with cancellation options for convenience starting on the fifth anniversary of the agreements.  First Solar is obligated to supply an inventory of spare parts and consumables necessary and appropriate for operation under the Sunlight 250 and Sunlight 300 agreements.   The service fee for the Sunlight 250 agreement is approximately $5.6 million annually and for the Sunlight 300 project is $6.8 million annually.  The fees are paid in equal quarterly installments of 25% of the annual total, due within 30 days.  On each anniversary of the commencement date, the

 

15



 

service fees are subject to a 2% annual escalation.  The third agreement is for the operations and maintenance of the Shared Facilities.  The service fee for the Shared Facilities O&M Agreement is $25,000 per year with 2% annual escalation paid in equal quarterly installments, due within 30 days.  Payments under these agreements have commenced in 2014.  Total expense for the year ended December 31, 2014 was approximately $9.0 million, and was classified in operations and maintenance costs in the accompanying statements of comprehensive income and statements of operations.

 

Large Generator Interconnection Agreements

 

Interconnection of the Projects to the California Independent System Operators (“CAISO”) controlled transmission grid and sharing of this interconnection between the Projects, was effected through several related agreements.  The standard large generator interconnection agreement (“LGIA”) as amended was entered into on August 19, 2011 between Holdings, Sunlight 250, Sunlight 300 and SCE.  The LGIA specifies that the Projects will interconnect with the Red Bluff Substation at the Red Bluff Substation 230 KV bus.  The LGIA co-tenancy agreement was entered into on August 19, 2011 between Sunlight 250 and Sunlight 300 and will set forth the rights and obligations of the Co-Tenants and Holdings as manager under the amended LGIA.

 

Shared Facilities Agreement

 

The Company entered into a shared facilities agreement (the “Shared Facilities Agreement”) on September 29, 2011.  Pursuant to the Shared Facilities Agreement, the Company will agree to own and use the Shared Facilities as tenants-in-common, with each owning an undivided interest in the Shared Facilities in proportion of its respective co-tenancy percentage interest of 54.55% and 45.45%, respectively.  In addition, the Shared Facilities Agreement appoints Holdings to act as their Manager and agent with respect to all aspects of the Shared Facilities, including day-to-day management and decision making.  The Company is responsible for, among other things, facilitating the operation and maintenance of the Shared Facilities.

 

Land Leases

 

U.S. Bureau of Land Management Land Lease

 

On August 11, 2011, the Company’s subsidiaries were granted approval of a Right-of-Way (“ROW”) Lease/Grant (the “Land Lease”) that provides for payments to the U.S. Bureau of Land Management (“BLM”) for the right to use the public lands upon which the Projects are located through December 31, 2040. The Land Lease may be renewed at expiration at the Company’s option and will be subject to the regulations existing at the time of renewal.

 

Payments under the Land Lease consist of base rent and a MW capacity fee that are subject to fee change based on inflation, will be phased in over the first five years of power generation, and will be paid in advance annually. As the base rent and the MW capacity fee are both based on fair value, these payments are considered contingent rent and are therefore recognized as incurred.

 

Total expense for the years ended December 31, 2014 and 2013 was approximately $2.0 million and $1.3 million, respectively, and was classified in operations and maintenance costs in the accompanying statements of comprehensive income.

 

In connection with the terms of the Land Lease, the Company entered into a surety bond with a non-affiliated party in favor of BLM on September 7, 2011 for $29.9 million. The surety bond remains in effect until the BLM is satisfied that there is no outstanding liability on the bond or satisfactory replacement bond coverage is furnished.

 

Franchise Agreement

 

On August 16, 2011, the Projects were granted approval of a 30-year franchise to construct and use an electrical transmission line under, along, across, or upon the Kaiser Road Rights-Of-Way in Eastern Riverside County (the “Franchise Agreement”).  The electrical transmission interconnects the Projects with SCE’s Red Bluff Station.

 

Payments under the Franchise Agreement are $600,000 annually, adjusted by the Consumer Price Index annually; however, in no event will the annual adjustment be less than 1% nor greater than 4%. Accordingly, lease expense

 

16



 

under the Franchise Agreement has been calculated on a straight-line basis over the 30 year term by taking into consideration the impacts of the annual minimum increase over the life of the agreement.

 

Total expense for the year ended December 31, 2014 and 2013, was approximately $0.7 million and $0.7 million, respectively, and was classified in operations and maintenance costs in the accompanying statements of comprehensive loss and statement of operations.

 

Future minimum lease payments under the land lease agreements for the years ended December 31 are as follows (in thousands):

 

 

 

2015

 

2016

 

2017

 

2018

 

2019

 

Thereafter

 

Franchise Agreement

 

$

651

 

657

 

664

 

670

 

677

 

$

15,894

 

 

Settlement Agreement

 

Prior to the Members’ acquisition of the Company and its subsidiaries, Sunlight 250, Sunlight 300 and Holdings entered into a settlement agreement with certain farmers to address their concerns regarding the impact of the Desert Sunlight project would have on their farms.  Under this agreement, certain annual payments would be made to the farmers in exchange for a commitment by the farmers that they will not commence, maintain, prosecute, support or finance any effort to challenge or oppose the construction of the Sunlight projects.  The Company has recorded the net present value of this ongoing settlement obligation by using the interest rates applicable to the A-1 Loans currently outstanding.  At December 31, 2014 the amount of the undiscounted obligation is approximately $0.4 million and is reflected under accounts payable and accrued expenses in the accompanying balance sheets.  The discounted amount of the settlement is approximately $0.3 million.

 

The Letter of Credit Facilities

 

At the inception of the project Sunlight 300 and Sunlight 250 entered into letter of credit facilities (the “LOC Facilities”), under which the LOC lender may issue standby letters of credit not to exceed approximately $276.2 million. These LOC’s are utilized to support the debt service reserve obligations of Sunlight 300 and Sunlight 250 under their respective loan agreements, development security and performance assurance collateral required under the PPAs and to support other obligations relating to the Projects, including site restoration obligations to the Title V of the Federal Land Policy and Management Act and the BLM ROW, the LGIA and the franchise agreement with Riverside County. The LOC Facilities do not benefit from a DOE guarantee.

 

The purpose and amounts of the outstanding letters of credit are as follows (in millions):

 

LOC Facility Purpose

 

Amount

 

Approximate LCs Outstanding Dates

 

 

 

 

 

 

 

PPA Development Security

 

6.7

 

Q4 ‘11 – Q1 ‘15

 

 

 

 

 

 

 

PPA Term Security

 

165.0

 

Q1 ‘14 - Maturity

 

 

 

 

 

 

 

Site Restoration

 

28.8

 

Q4 ‘11 - Maturity

 

 

 

 

 

 

 

LGIA

 

0.7

 

Q4 ‘10 - Maturity

 

 

 

 

 

 

 

Total

 

$

201.2

 

 

 

 

17


Exhibit 99.2

 

Desert Sunlight Investment Holdings, LLC and Subsidiaries

Condensed Consolidated Balance Sheets

(Dollars in thousands)

(Unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

82,629

 

$

20,913

 

Accounts receivable

 

237,793

 

578,147

 

Prepaid expenses and other current assets

 

1,986

 

2,102

 

Restricted investments

 

67,927

 

104,836

 

Total current assets

 

390,335

 

705,998

 

NON-CURRENT ASSETS

 

 

 

 

 

Property, plant and equipment, net

 

1,452,130

 

1,476,951

 

Deferred financing costs, net

 

29,661

 

31,545

 

Other non-current assets

 

9,836

 

10,012

 

Total non-current assets

 

1,491,627

 

1,518,508

 

TOTAL ASSETS

 

$

1,881,962

 

$

2,224,506

 

 

 

 

 

 

 

LIABILITIES AND MEMBER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable and accrued expenses

 

$

14,763

 

$

21,722

 

Accrued interest

 

8,169

 

13,731

 

Current maturities of long-term debt

 

42,687

 

393,722

 

Due to related parties

 

585

 

933

 

Derivative liabilities

 

9,164

 

5,967

 

Total current liabilities

 

75,368

 

436,075

 

NON-CURRENT LIABILITIES

 

 

 

 

 

Long-term debt

 

1,106,748

 

1,116,114

 

Derivative liabilities

 

14,367

 

17,495

 

Asset retirement obligations

 

19,073

 

18,582

 

Other non-current liabilities

 

340

 

301

 

Total non-current liabilities

 

1,140,528

 

1,152,492

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

1,215,896

 

1,588,567

 

 

 

 

 

 

 

TOTAL MEMBER’S EQUITY

 

666,066

 

635,939

 

 

 

 

 

 

 

TOTAL LIABILITIES AND MEMBER’S EQUITY

 

$

1,881,962

 

$

2,224,506

 

 

The accompanying notes are an integral part of these financial statements.

 



 

Desert Sunlight Investment Holdings, LLC and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

For the six months ended June 30, 2015 and 2014

(Dollars in thousands)

(Unaudited)

 

 

 

For the six months ended
June 30,

 

 

 

2015

 

2014

 

OPERATING REVENUES

 

$

97,188

 

$

53,816

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

Operations and maintenance

 

13,868

 

11,113

 

Depreciation and amortization

 

25,814

 

17,076

 

Taxes other than income taxes and other

 

357

 

245

 

Total operating expenses

 

40,039

 

28,434

 

 

 

 

 

 

 

OPERATING INCOME

 

57,149

 

25,382

 

 

 

 

 

 

 

OTHER DEDUCTIONS

 

 

 

 

 

Interest expense

 

25,796

 

20,618

 

Total other deductions

 

25,796

 

20,618

 

 

 

 

 

 

 

NET INCOME

 

$

31,353

 

$

4,764

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

Net unrealized gains / losses on cash flow hedges:

 

 

 

 

 

Effective portion of net unrealized gain (loss)

 

(2,079

)

(15,666

)

Reclassification from accumulated other comprehensive income to net income

 

4,195

 

1,350

 

Total other comprehensive income (loss)

 

2,116

 

(14,316

)

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

$

33,469

 

$

(9,552

)

 

The accompanying notes are an integral part of these financial statements.

 



 

Desert Sunlight Investment Holdings, LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2015 and 2014

(Dollars in thousands)

(Unaudited)

 

 

 

For the six
months ended
June 30, 2015

 

For the six
months ended
June 30, 2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

31,353

 

$

4,764

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Amortization of debt issuance costs

 

1,884

 

5,430

 

Depreciation and amortization

 

25,814

 

17,076

 

Mark to market for derivatives and amortization of derivatives Changes in assets:

 

2,186

 

984

 

Accounts receivable

 

(20,234

)

(15,675

)

Prepaid expenses and other current assets

 

116

 

736

 

Other non-current assets

 

 

(435

)

Changes in liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

2,322

 

4,526

 

Accrued interest

 

(5,562

)

9,681

 

Due to related parties

 

(348

)

(718

)

Other non-current liabilities

 

39

 

42

 

NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES

 

37,570

 

26,411

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(9,488

)

(344,120

)

Receipt of CITC grant proceeds

 

360,468

 

 

Restricted investments

 

36,909

 

(10,353

)

NET CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

387,889

 

(354,473

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Debt issuance

 

 

221,800

 

Debt repayment

 

(360,401

)

 

Member contributions

 

 

119,520

 

Member distributions

 

(3,342

)

 

Financing costs

 

 

(661

)

NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

(363,743

)

340,659

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

61,716

 

12,597

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, Beginning of Period

 

20,913

 

5,226

 

CASH AND CASH EQUIVALENTS, End of Period

 

$

82,629

 

$

17,823

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW INFORMATION

 

 

 

 

 

Cash paid for interest, net of capitalized interest

 

$

25,384

 

$

6,470

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:

 

 

 

 

 

Plant, property and equipment, net, included in accounts payable and accrued expenses

 

$

 

$

29,445

 

Reductions to property, plant, and equipment, net, via accounts receivable for convertible investment tax credits (“CITC”) / test revenues

 

$

 

$

73,359

 

Increase to deferred financing costs from accounts payable and accrued expenses

 

$

 

$

414

 

Additions to property, plant and equipment, net for ARO

 

$

 

$

4,730

 

 

The accompanying notes are an integral part of these financial statements.

 



 

Desert Sunlight Investment Holdings, LLC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the periods ended June 30, 2015 and 2014

 

1                                         Organization

 

Desert Sunlight Investment Holdings, LLC (the “Company”), a Delaware limited liability company, was formed on September 8, 2011 for the purpose of holding a 100% interest in Desert Sunlight Holdings, LLC (“Holdings”), a Delaware limited liability company which was formed on December 15, 2009 for the purpose of holding a 100% interest in Desert Sunlight 250, LLC (“Sunlight 250”) and Desert Sunlight 300, LLC (“Sunlight 300”), (collectively the “Projects”). The Company, Holdings, Sunlight 250, and Sunlight 300 are collectively referred to as the “Company and its subsidiaries.”  Holdings and the Projects were created to develop, finance, construct, own and operate 550 megawatts (“MW”) of alternating current (“AC”) solar photovoltaic (“PV”) electric generating facilities, including an approximately 12-mile long generation-tie line, certain monitoring and maintenance infrastructure and other ancillary facilities (the “Shared Facilities”) located on approximately 4,000 acres of land in the Chuckwalla Valley, which is approximately six miles north of Desert Center, California.  The Projects consist of two solar electric generating facilities, with a nominal net output of 250 MW and 300 MW, respectively.

 

NextEra Desert Sunlight Holdings, LLC, a Delaware limited liability company (the “NextEra Member”), is the initial Class A Member and the initial Managing Member, and EFS Desert Sun, LLC, a Delaware limited liability company (the “GECC Member”) is the initial Class B Member of Holdings.  First Solar Development, Inc., NextEra Member and GECC Member are parties to a Membership Interest Purchase and Sale Agreement, dated September 29, 2011 (the “MIPSA”) pursuant to which NextEra and GECC Members each separately agreed, among other things, to purchase from First Solar Development, Inc. fifty percent of the membership interests in Holdings.  NextEra and GECC Members each contributed their fifty percent share of the membership interests in Holdings to the Company in exchange for a fifty percent share of the membership interests in the Company for which NextEra and GECC Members have equal rights. On September 27, 2012, the GECC member sold 50% of its Class B shares (25% of total equity) to Sumitomo Corporation of America (the “Sumitomo Sponsor”) and Sumitomo Solar Desert Sunlight, LLC, a Delaware limited liability company (the “Sumitomo Member”).  On June 29, 2015, the GECC member sold its remaining 50% of its Class B shares (25% of total equity) to NRG Yield Operating LLC (the “NRG Yield Member”). As a result, NextEra, NRG Yield and Sumitomo Members are collectively the “Members” of the Company.

 

The NextEra Member is an affiliate of ESI Energy, LLC which is a wholly-owned subsidiary of NextEra Energy Resources, LLC (“NextEra”), which is a wholly-owned subsidiary of NextEra Energy, Inc., a New York Stock Exchange company.  The NRG Yield Member is an affiliate of NRG Yield, Inc., a New York Stock Exchange company, which is also an affiliate of NRG Energy, Inc., a New York Stock Exchange company. The Sumitomo Member is an affiliate of the Sumitomo Sponsor, which is an indirect subsidiary of the Sumitomo Corporation of Japan, a Tokyo Stock Exchange company.

 

The Projects employ AC PV technology and utilizes First Solar Inc.’s (“First Solar”) PV modules, which are a technology currently in commercial use in numerous utility-scale and other projects located in multiple countries.  These modules convert sunlight to electricity.  The direct current electricity generated by the modules are converted to alternating current using inverters.  The Projects were constructed and are operated by an affiliate of First Solar.

 

During December of 2013, the Projects achieved partial commercial operations, including turnover of 10 of its approximately 20 blocks, generation of initial operating revenues, and placing its shared facilities in service.  All remaining capacity was placed in service in 2014, with the final Blocks achieving their commercial operation dates (“COD”) in the fourth quarter of 2014.

 

The Members share profits and losses and cash flows in proportion to their ownership percentage interests.

 

The accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, the interim financial information reflects all adjustments of a normal recurring nature, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented. The following notes should be read in conjunction with the accounting policies and other disclosures as set forth in the notes to the Company’s annual financial statements.  Interim results are not necessarily indicative of results for a full year.

 



 

2                                         Significant Accounting Policies

 

Basis of Presentation — The accompanying consolidated financial statements of the Company include the accounts of the Company and its subsidiaries.  All material intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Accounts Receivable — Accounts receivable includes Convertible Investment Tax Credits (“CITC”) in connection with renewable energy grants. As of December 31, 2014, accounts receivable at the Company arising from CITCs were $570.0 million.  On May 1, 2015, the Company received $360.4 million in renewable energy grant proceeds leaving a remaining balance of $209.6 million of accounts receivable arising from CITCs. On July 2, 2015, the Desert Sunlight project companies filed a lawsuit in the U.S. District Court for the District of Columbia seeking a judicial order mandating immediate payment of the remaining balance of grant proceeds sought by the Company. The lawsuit is pending.

 

Subsequent Events — The Company has performed an evaluation of subsequent events through September 15, 2015, which is the date the financial statements were available to be issued.

 

3                                         Long-term Debt

 

The Projects’ approximately $2.3 billion capital cost was funded with a combination of Member equity contributions and debt.  Prior to the completion of the Projects, the costs were being funded pro-rata by debt and equity proceeds in order to maintain the target debt capitalization ratio of approximately 65%.  The Company and its subsidiaries entered into three distinct tranches of debt.  Any member contributions, revenues, or property of Sunlight 300 or Sunlight 250 may be treated as collateral security for loan obligations.

 

The Company applied for approximately $570.0 million in CITC grant receivables from the Treasury.  These cash grant proceeds have been applied for in various applications through December 2014.  On May 4, 2015 the Company received $360.4 million in proceeds from these cash grant applications.  The proceeds were primarily utilized to repay the entire outstanding principal of the Company’s A-3 Loans $292.0 million and Lock Loans $58.2 million on May 29, 2015.

 

4                                         Fair Value Measurements

 

The Company and its subsidiaries use several valuation techniques to measure the fair value of assets and liabilities, relying primarily on the income approach of using prices and other market information for identical and/or comparable assets and liabilities for those assets and liabilities that are measured on a recurring basis.  Certain derivatives and financial instruments may be valued by taking into consideration multiple inputs, including interest rate swap and LIBO rates and treasury yields, as well as counterparty credit ratings and credit enhancements.  Additionally, when observable market data is not sufficient, valuation models are developed that incorporate the Company’s proprietary views of market factors and conditions. The Company’s assessment of the significance of any particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

 

Cash Equivalents — The fair value of money market funds is calculated using current market prices.

 

Interest Rate Swaps — The Company estimates the fair value of its derivatives using a discounted cash flows valuation technique based on the net amount of estimated future cash inflows and outflows related to the swap agreements.  The primary inputs used in the fair value measurements include the contractual terms of the derivative agreements, current interest rates and credit spreads.  The significant inputs for the resulting fair value measurement are market-observable inputs and the measurements are reported as Level 2 in the fair value hierarchy.

 

The interest rate swap assets (liabilities) and the money market funds held at the Company are reported at fair value on a recurring basis.  Fair values by hierarchy level are as follows (in thousands):

 



 

 

 

As of June 30, 2015

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

Active Markets for

 

 

 

Significant

 

 

 

 

 

Identical Assets or

 

Significant

 

Unobservable

 

 

 

 

 

Liabilities

 

Observable Inputs

 

Inputs

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

 

 

 

 

 

 

 

 

 

 

Derivitive liabilities:

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

 

$

(23,531

)

$

 

$

(23,531

)

 

 

 

 

 

 

 

 

 

 

Cash Equivalents

 

 

 

 

 

 

 

 

 

Money Market Funds

 

79,869

 

 

 

79,869

 

 

 

 

 

 

 

 

 

 

 

Restricted Investments

 

 

 

 

 

 

 

 

 

Money Market Funds

 

67,927

 

 

 

67,927

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

147,796

 

$

(23,531

)

$

 

$

124,265

 

 

 

 

As of December 31, 2014

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

Active Markets for

 

 

 

Significant

 

 

 

 

 

Identical Assets or

 

Significant

 

Unobservable

 

 

 

 

 

Liabilities

 

Observable Inputs

 

Inputs

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

 

 

 

 

 

 

 

 

 

 

Derivitive liabilities:

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

 

$

(23,462

)

$

 

$

(23,462

)

 

 

 

 

 

 

 

 

 

 

Cash Equivalents

 

 

 

 

 

 

 

 

 

Money Market Funds

 

17,348

 

 

 

17,348

 

 

 

 

 

 

 

 

 

 

 

Restricted Investments

 

 

 

 

 

 

 

 

 

Money Market Funds

 

104,836

 

 

 

104,836

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

122,184

 

$

(23,462

)

$

 

$

98,722

 

 

5                                         Derivative Instruments and Hedging Activity

 

Treasury Lock and Interest Rate Swap Agreements

 

In October of 2011, the Company entered into the Locks to fix the treasury component of coupons associated with the future fixed rate borrowings on the A-1 Loans, and interest rate swap agreements to fix the LIBO rate component of the interest rate of the future borrowings of the A-2 and A-3 loans, which were drawn, as needed, for certain expenditures incurred during construction.  The combined Lock notional amounts were $435.0 million.  In February and August 2012, the Locks settled for $58.2 million and the Company entered into the Lock Loans for the settlement amount.

 

The interest rate swaps have effective dates that started in July 2013.  The last of these swaps will mature in October 2026.  The notional amount of the Company’s interest rate swaps at June 30, 2015 and December 31, 2014 was $382.5 million and $211.1 million, respectively.

 

The interest rate swap agreements are derivatives and qualify for hedge accounting.  The fair value of the Company’s derivative instruments are included in its consolidated balance sheets as follows (in thousands):

 



 

 

 

As of June 30,

 

As of December 31,

 

 

 

2015

 

2014

 

 

 

Derivative

 

Derivative

 

 

 

Liabilities

 

Liabilities

 

 

 

 

 

 

 

Interest rate swaps:

 

 

 

 

 

Current liabilities

 

$

(9,164

)

$

(5,967

)

Non-current liabilities

 

(14,367

)

(17,495

)

 

 

 

 

 

 

Total derivative liabilities

 

$

(23,531

)

$

(23,462

)

 

Gains (losses) related to the Company’s cash flow hedges are recoded in its statements of comprehensive income as follows (in thousands):

 

 

 

For the six months

 

 

 

ended June 30,

 

 

 

2015

 

2014

 

 

 

Derivative

 

Derivative

 

 

 

Balances

 

Balances

 

 

 

 

 

 

 

Losses recognized in OCI

 

$

(2,079

)

$

(15,666

)

Losses reclassified from AOCI to net income (a)

 

(4,195

)

(1,350

)

 


(a) included in interest expense

 


Exhibit 99.3

 

PRO FORMA FINANCIAL STATEMENTS

Unaudited Pro Forma Condensed Consolidated Combined Financial Statements

 

The Unaudited Pro Forma Condensed Consolidated Combined Financial Statements, or the pro forma financial statements, combine the historical consolidated financial statements of NRG Yield and the historical impact of the Company’s 25% ownership of Desert Sunlight Investment Holdings, LLC, or Desert Sunlight, to illustrate the effect of the Desert Sunlight Acquisition. The pro forma financial statements were based on, and should be read in conjunction with, the:

 

· accompanying notes to the Unaudited Pro Forma Condensed Consolidated Combined Financial Statements;

 

· consolidated financial statements of NRG Yield for the year ended December 31, 2014 and for the six months ended June 30, 2015 and the notes relating thereto, included in NRG Yield’s Annual Report on Form 10-K for the year ended December 31, 2014, Current Report on Form 8-K filed on May 22, 2015 and Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015;

 

· consolidated financial statements of Desert Sunlight Investment Holdings, LLC for the year ended December 31, 2014 and for the six months ended June 30, 2015 and the notes relating thereto, included within Exhibits 99.1 and 99.2 to this Form 8-K/A.

 

The historical consolidated financial statements have been adjusted in the pro forma financial statements to give effect to pro forma events that are (1) directly attributable to the Desert Sunlight Acquisition, (2) factually supportable and (3) with respect to the pro forma statements of operations, expected to have a continuing impact on the combined results. The Unaudited Pro Forma Condensed Consolidated Combined Statements of Operations, or the pro forma statements of operations, for the year ended December 31, 2014 and for the six months ended June 30, 2015, give effect to the Desert Sunlight Acquisition as if it occurred on January 1, 2014. A pro forma balance sheet is not required as the Desert Sunlight Acquisition occurred on June 29, 2015.

 

The pro forma financial statements have been presented for informational purposes only and are not necessarily indicative of what the combined company’s results of operations and financial position would have been had the Desert Sunlight Acquisition been completed on the dates indicated. The pro forma financial statements do not purport to project the future results of operations or financial position of the combined company.

 



 

Unaudited Pro Forma Condensed Consolidated Combined Income Statement

Six Months Ended June 30, 2015

 

 

 

NRG Yield, Inc.

 

Pro Forma
Adjustments

 

Pro Forma
Combined

 

 

 

(in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

Total operating revenues

 

$

217

 

$

 

$

217

 

 

 

 

 

 

 

 

 

Operating Costs and Expenses

 

 

 

 

 

 

 

Cost of operations

 

67

 

 

67

 

Depreciation and amortization

 

59

 

 

59

 

General and administrative - affiliate

 

3

 

 

3

 

Acquisition-related transaction and integration costs

 

1

 

 

1

 

Total operating costs and expenses

 

130

 

 

130

 

 

 

 

 

 

 

 

 

Operating Income

 

87

 

 

87

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

Equity in earnings of unconsolidated affiliates

 

9

 

8

(a)

17

 

Other income, net

 

 

 

 

Loss on debt extinguishment

 

(7

)

 

 

(7

)

Interest expense

 

(44

)

 

(44

)

Total other expense

 

(42

)

8

 

(34

)

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

45

 

8

 

53

 

 

 

 

 

 

 

 

 

Income tax expense

 

4

 

2

(b)

6

 

 

 

 

 

 

 

 

 

Net Income

 

41

 

6

 

47

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interests

 

31

 

4

(c)

35

 

Net Income Attributable to NRG Yield, Inc.

 

$

10

 

$

2

 

$

12

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Class A and Class Common stockholders

 

 

 

 

 

 

 

Weighted average number of Class A and Class C common shares outstanding - basic and diluted

 

35

 

 

 

35

 

Earnings per Class A and Class C common share - basic and diluted

 

$

0.07

 

 

 

$

0.08

 

 



 

Unaudited Pro Forma Condensed Consolidated Combined Income Statement

Year Ended December 31, 2014

 

 

 

NRG Yield,
Inc.

 

Pro Forma
Adjustments

 

Pro Forma
Combined

 

 

 

(in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

Total operating revenues

 

$

689

 

$

 

$

689

 

 

 

 

 

 

 

 

 

Operating Costs and Expenses

 

 

 

 

 

 

 

Cost of operations

 

239

 

 

239

 

Depreciation and amortization

 

166

 

 

166

 

General and administrative - affiliate

 

8

 

 

8

 

Acquisition-related transaction and integration costs

 

4

 

 

4

 

Total operating costs and expenses

 

417

 

 

417

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

272

 

 

272

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

Equity in earnings of unconsolidated affiliates

 

27

 

8

(a)

35

 

Other income, net

 

3

 

 

3

 

Interest expense

 

(186

)

 

(186

)

Total other income (expense)

 

(156

)

8

 

(148

)

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

116

 

8

 

124

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

4

 

2

(b)

6

 

 

 

 

 

 

 

 

 

Net Income

 

112

 

6

 

118

 

 

 

 

 

 

 

 

 

Less: Pre-acquisition net income of Drop Down Assets

 

48

 

 

48

 

 

 

 

 

 

 

 

 

Net Income Excluding Pre-Acquisition Net Income of Drop Down Assets

 

64

 

6

 

70

 

 

 

 

 

 

 

 

 

Less: Net income attributable to NRG

 

48

 

4

(c)

52

 

 

 

 

 

 

 

 

 

Net Income Attributable to NRG Yield, Inc.

 

$

16

 

$

2

 

$

18

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Class A and Class Common stockholders

 

 

 

 

 

 

 

Weighted average number of Class A and Class C common shares outstanding - basic and diluted

 

28

 

 

28

 

Earnings per Class A and Class C common share - basic and diluted

 

$

0.30

 

 

 

$

0.33

 

 



 

Notes to the Unaudited Pro Forma Condensed Consolidated Combined Financial Statements

 


(a)         Reflects the Company’s 25% share of Desert Sunlight’s net income for the period.

(b)         Reflects the adjustment to record the tax effect of Desert Sunlight’s net income for the period, calculated using NRG Yield’s effective tax rate.

(c)          Represents the adjustment to noncontrolling interest associated with the inclusion of the Company’s 25% share of Desert Sunlight’s net income for the period in NRG Yield’s results.