NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The accompanying condensed consolidated financial statements should be read in conjunction with the
2016
Form 10-K. In the opinion of NEP management, all adjustments (consisting of normal recurring accruals) considered necessary for fair financial statement presentation have been made. Certain amounts included in the prior year's condensed consolidated financial statements have been reclassified to conform to the current year's presentation. The results of operations for an interim period generally will not give a true indication of results for the year.
1. Acquisitions
During 2016, a subsidiary of NEP completed several acquisitions from NEER which were transfers of assets between entities under common control and required them to be accounted for as if the transfers occurred since the inception of common control, with prior periods retrospectively adjusted to furnish comparative information. Accordingly, the accompanying condensed consolidated financial statements have been retrospectively adjusted to include the historical results and financial position of the common control acquisitions prior to their respective acquisition dates.
On April 20, 2017, an indirect subsidiary of NEP entered into a purchase and sale agreement with an indirect subsidiary of NEER to acquire Golden West Wind Holdings, LLC, which indirectly owns an approximately
249
MW wind generating facility located in El Paso County, Colorado. NEP expects to complete the acquisition in the second quarter of 2017 for a total consideration of approximately
$238 million
, plus the assumption of approximately
$184 million
in existing liabilities related to differential membership interests. The purchase price is subject to working capital and other adjustments.
2. Income Taxes
For periods prior to the date a project is acquired by NEP (NEP acquisition date), income taxes are calculated on the predecessor method using the separate return method for the renewable energy projects structured as limited liability companies or corporations. Income taxes are not included for entities that are structured as flow through entities (partnerships).
For periods after the NEP acquisition date, income taxes are calculated on the successor method where taxes are calculated for NEP as a single taxpaying corporation for U.S. federal and state income taxes (based on its election to be taxed as a corporation). Because NEP OpCo is a limited partnership, NEP only recognizes in income its applicable ownership share of U.S. income taxes related to the U.S. and Canadian projects, allocated by NEP OpCo. The Canadian subsidiaries are all Canadian taxpayers, and therefore NEP recognizes in income all of the Canadian taxes.
For periods after the NEP acquisition date, income taxes include NEP's applicable ownership share of U.S. taxes and 100% of Canadian taxes. Net income or loss attributable to noncontrolling interest includes no U.S. taxes and NEER's applicable ownership share of Canadian taxes. Net income attributable to NEP includes NEP's applicable ownership share of U.S. and Canadian taxes.
The effective tax rates for the
three months ended March 31, 2017
and
2016
were approximately
16%
and
14%
, respectively. The effective tax rate is affected by recurring items, such as the relative amount of income earned in jurisdictions, valuation allowances on deferred tax assets, taxes attributable to the noncontrolling interest and the taxation of Canadian income in both Canada and the U.S.
3. Fair Value Measurements
The fair value of assets and liabilities are determined using either unadjusted quoted prices in active markets (Level 1) or pricing inputs that are observable (Level 2) whenever that information is available and using unobservable inputs (Level 3) to estimate fair value only when relevant observable inputs are not available. NEP uses several different valuation techniques to measure the fair value of assets and liabilities relying primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities for those assets and liabilities that are measured at fair value on a recurring basis. Certain financial instruments may be valued using multiple inputs including discount rates, counterparty credit ratings and credit enhancements. NEP’s assessment of the significance of any particular input to the fair value measurement requires judgment and may affect the placement of those assets and liabilities within the fair value hierarchy levels. Non-performance risk, including the consideration of a credit valuation adjustment, is also considered in the determination of fair value for all assets and liabilities measured at fair value. Transfers between fair value hierarchy levels occur at the beginning of the period in which the transfer occurred.
Cash Equivalents and Restricted Cash Equivalents -
The fair value of money market funds that are included in cash and cash equivalents, restricted cash and other non-current assets on the condensed consolidated balance sheets is estimated using a market approach based on current observable market prices.
NEXTERA ENERGY PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Interest Rate and Foreign Currency Contracts -
NEP estimates the fair value of its derivatives using an income approach based on a discounted cash flows valuation technique utilizing the net amount of estimated future cash inflows and outflows related to the agreements. The primary inputs used in the fair value measurements include the contractual terms of the derivative agreements, current interest rates, foreign currency exchange rates and credit profiles. 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.
NEP’s financial assets and liabilities and other fair value measurements made on a recurring basis by fair value hierarchy level are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
(millions)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
66
|
|
|
$
|
—
|
|
|
$
|
66
|
|
Restricted cash equivalents
|
32
|
|
|
—
|
|
|
32
|
|
|
29
|
|
|
—
|
|
|
29
|
|
Interest rate contracts
|
—
|
|
|
14
|
|
|
14
|
|
|
—
|
|
|
15
|
|
|
15
|
|
Foreign currency contracts
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Total assets
|
$
|
54
|
|
|
$
|
15
|
|
|
$
|
69
|
|
|
$
|
95
|
|
|
$
|
16
|
|
|
$
|
111
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
—
|
|
|
$
|
41
|
|
|
$
|
41
|
|
|
$
|
—
|
|
|
$
|
44
|
|
|
$
|
44
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
41
|
|
|
$
|
41
|
|
|
$
|
—
|
|
|
$
|
44
|
|
|
$
|
44
|
|
Financial Instruments Recorded at Other than Fair Value -
The carrying amount of short-term debt approximates its fair value. The carrying amounts and estimated fair values of other financial instruments recorded at other than fair value are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
(millions)
|
Long-term debt, including current maturities
(a)
|
$
|
3,768
|
|
|
$
|
3,895
|
|
|
$
|
3,586
|
|
|
$
|
3,680
|
|
____________________
|
|
(a)
|
As of
March 31, 2017
and December 31, 2016, approximately
$2,995 million
and
$2,808 million
, respectively, of the fair value is estimated using a market approach based on quoted market prices for the same or similar issues (Level 2); the balance is estimated using an income approach utilizing a discounted cash flow valuation technique, considering the current credit profile of the debtor (Level 3).
|
4. Derivative Instruments and Hedging Activity
NEP recognizes all derivative instruments, when required to be marked to market, on the condensed consolidated balance sheets as either assets or liabilities and measures them at fair value each reporting period. NEP does not utilize hedge accounting for its derivative instruments. In connection with certain of its outstanding and expected future debt issuances and borrowings, NEP entered into interest rate contracts to manage interest rate cash flow risk. These agreements allow NEP to offset the variability of its floating-rate interest cash flows with the variable interest cash flows received from the interest rate contracts. All changes in the derivatives' fair value are recognized in interest expense in the condensed consolidated statements of income. The commencement and termination dates of the interest rate swap agreements and the related hedging relationship coincide with the corresponding dates of the underlying variable-rate debt instruments. As of
March 31, 2017
and
December 31, 2016
, the combined notional amounts of the interest rate contracts were approximately
$2,113 million
and
$2,119 million
, respectively.
At
March 31, 2017
, NEP's AOCI included amounts related to discontinued cash flow hedges, which have expiration dates through 2033. At March 31, 2017, approximately
$7 million
of net unrealized losses are expected to be reclassified into interest expense within the next 12 months as interest payments are made. Such amount assumes no change in scheduled principal payments. Cash flows from these interest rate swap contracts are reported in cash flows from operating activities in the condensed consolidated statements of cash flows.
NEP enters into certain foreign currency exchange contracts to economically hedge its cash flows from foreign currency rate fluctuations. As of
March 31, 2017
and
December 31, 2016
, the notional amount of the foreign currency contracts was approximately
$55 million
and
$46 million
, respectively. During the
three months ended March 31, 2017
and
2016
, NEP recorded approximately
$1 million
and
$3 million
of losses, respectively, related to the foreign currency contracts in other - net in the condensed consolidated statements of income.
NEXTERA ENERGY PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Fair Value of Derivative Instruments
- The tables below present NEP's gross derivative positions, based on the total fair value of each derivative instrument, at
March 31, 2017
and
December 31, 2016
, as required by disclosure rules, as well as the location of the net derivative positions, based on the expected timing of future payments, on the condensed consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Gross Basis
|
|
Net Basis
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
(millions)
|
Interest rate contracts
|
$
|
14
|
|
|
$
|
41
|
|
|
$
|
16
|
|
|
$
|
43
|
|
Foreign currency contracts
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Total fair values
|
$
|
15
|
|
|
$
|
41
|
|
|
$
|
17
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
Net fair value by balance sheet line item:
|
|
|
|
|
|
|
|
Other current assets
|
|
|
|
|
$
|
2
|
|
|
|
Other non-current assets
|
|
|
|
|
15
|
|
|
|
Current derivative liabilities
|
|
|
|
|
|
|
$
|
17
|
|
Other non-current liabilities
|
|
|
|
|
|
|
26
|
|
Total derivatives
|
|
|
|
|
$
|
17
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Gross Basis
|
|
Net Basis
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
(millions)
|
Interest rate contracts
|
$
|
15
|
|
|
$
|
44
|
|
|
$
|
17
|
|
|
$
|
46
|
|
Foreign currency contracts
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Total fair values
|
$
|
16
|
|
|
$
|
44
|
|
|
$
|
18
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
Net fair value by balance sheet line item:
|
|
|
|
|
|
|
|
Other current assets
|
|
|
|
|
$
|
1
|
|
|
|
Other non-current assets
|
|
|
|
|
17
|
|
|
|
Current derivative liabilities
|
|
|
|
|
|
|
$
|
18
|
|
Other non-current liabilities
|
|
|
|
|
|
|
28
|
|
Total derivatives
|
|
|
|
|
$
|
18
|
|
|
$
|
46
|
|
Financial Statement Impact of Derivative Instruments
- Losses related to NEP's interest rate contracts are recorded in the condensed consolidated financial statements as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
(millions)
|
Interest rate contracts:
|
|
Losses reclassified from AOCI to interest expense
|
|
$
|
(3
|
)
|
|
$
|
(1
|
)
|
Losses recognized in interest expense
|
|
$
|
(2
|
)
|
|
$
|
(44
|
)
|
5. Variable Interest Entities
NEP has identified NEP OpCo as a VIE. NEP OpCo is a limited partnership with a general partner and limited partners. NEP has consolidated the results of NEP OpCo and its subsidiaries because of its controlling interest in the general partner of NEP OpCo. At
March 31, 2017
, NEP owned an approximately
34.8%
limited partner interest in NEP OpCo and NEE Equity owned a noncontrolling
65.2%
limited partner interest in NEP OpCo. The assets and liabilities of NEP OpCo as well as the operations of NEP OpCo represent substantially all of NEP's assets and liabilities and its operations.
In addition, at
March 31, 2017
, NEP consolidated
four
VIEs related to certain subsidiaries that have sold differential membership interests in entities which own and operate
six
wind electric generation facilities. Certain investors that have no equity at risk in the VIEs hold differential membership interests, which give them the right to receive a portion of the economic attributes of these wind electric generation facilities, including certain tax attributes. The assets and liabilities of the VIEs, consisting primarily of property, plant and equipment - net and deferral related to differential membership interests, totaled approximately
$1,634 million
and
$914 million
at
March 31, 2017
, respectively, and
$1,647 million
and
$929 million
at
December 31, 2016
, respectively.
NEXTERA ENERGY PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
In October 2016, a subsidiary of NEP completed the acquisition from NEER of an indirect
24%
interest in Desert Sunlight Investment Holdings, LLC (Desert Sunlight) which is reflected as investment in equity method investee on the condensed consolidated balance sheets. Desert Sunlight owns two project entities, which together make up the Desert Sunlight Solar Energy Center, a
550
MW solar generation plant located in Riverside County, California. NEER retained an interest in Desert Sunlight and will remain the managing member. NEP is not the primary beneficiary and therefore does not consolidate this entity because it does not control any of the ongoing activities of this entity, was not involved in the initial design of this entity and does not have a controlling interest in this entity.
In April 2015, a subsidiary of NEP made an equity method investment in
three
NEER solar projects. Through a series of transactions, a subsidiary of NEP issued
1,000,000
NEP OpCo Class B Units, Series 1 and
1,000,000
NEP OpCo Class B Units, Series 2, to NEER for approximately
50%
of the ownership interests in the
three
solar projects (non-economic ownership interests). NEER, as holder of the Class B Units, will retain
100%
of the economic rights in the projects to which the respective Class B Units relate, including the right to all distributions paid by the project subsidiaries. NEER has agreed to indemnify NEP against all risks relating to NEP’s ownership of the projects until NEER offers to sell economic interests to NEP and NEP accepts such offer, if NEP chooses to do so. NEER has also agreed to continue to manage the operation of the projects at its own cost, and to contribute to the projects any capital necessary for the operation of the projects, until NEER offers to sell economic interests to NEP and NEP accepts such offer. At
March 31, 2017
and
December 31, 2016
, NEP's equity method investment related to the non-economic ownership interests is reflected as investments in non-economic ownership interests on the condensed consolidated balance sheets. All equity in earnings of the non-economic ownership interests is allocated to net income attributable to noncontrolling interest. NEP is not the primary beneficiary and therefore does not consolidate these entities because it does not control any of the ongoing activities of these entities, was not involved in the initial design of these entities and does not have a controlling interest in these entities.
6. Capitalization
Debt
- Significant long-term debt issuances and borrowings by subsidiaries of NEP during the
three months ended March 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Date Issued
|
|
Debt Issuances/Borrowings
|
|
Interest
Rate
|
|
Principal
Amount
|
|
Maturity
Date
|
|
|
|
|
|
|
(millions)
|
|
|
February 2017
|
|
Senior secured revolving credit facility
|
|
Variable
(a)
|
|
$
|
10
|
|
|
2019
|
March 2017
|
|
Senior secured term loans
|
|
Variable
(a)
|
|
$
|
200
|
|
|
2018 - 2019
|
————————————
|
|
(a)
|
Variable rate is based on an underlying index plus a margin.
|
The long-term debt agreements listed above are secured by liens on certain assets and contain provisions which, under certain conditions, could restrict the payment of distributions or related party fee payments. At March 31, 2017, NEP's subsidiaries were in compliance with all financial debt covenants under their project financings; however, in the fourth quarter of 2016, one project was unable to fully fund its debt reserve by approximately
$2 million
.
Equity
- On April 20, 2017, the board of directors of NEP GP authorized a distribution of $
0.365
per common unit payable on May 15, 2017 to its unitholders of record on May 8, 2017.
NEXTERA ENERGY PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
7. Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Net Unrealized
Gains (Losses) on
Cash Flow Hedges
|
|
Net Unrealized
Losses on
Foreign Currency
Translation
|
|
Other Comprehensive
Income (Loss) Related to
Equity Method Investee
|
|
Total
|
|
(millions)
|
Three months ended March 31, 2017
|
|
|
|
|
|
|
|
Balances, December 31, 2016
|
$
|
(4
|
)
|
|
$
|
(105
|
)
|
|
$
|
(16
|
)
|
|
$
|
(125
|
)
|
Amounts reclassified from AOCI to interest expense
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Other comprehensive income related to equity method investee
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Net other comprehensive income
|
2
|
|
|
—
|
|
|
1
|
|
|
3
|
|
Balances, March 31, 2017
|
$
|
(2
|
)
|
|
$
|
(105
|
)
|
|
$
|
(15
|
)
|
|
$
|
(122
|
)
|
AOCI attributable to noncontrolling interest
|
$
|
(3
|
)
|
|
$
|
(101
|
)
|
|
$
|
(16
|
)
|
|
$
|
(120
|
)
|
AOCI attributable to NEP
|
$
|
1
|
|
|
$
|
(4
|
)
|
|
$
|
1
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
|
|
Net Unrealized
Gains (Losses) on
Cash Flow Hedges
|
|
Net Unrealized
Gains (Losses) on
Foreign Currency
Translation
|
|
Other Comprehensive
Loss Related to
Equity Method Investee
|
|
Total
|
|
(millions)
|
Three months ended March 31, 2016
|
|
|
|
|
|
|
|
Balances, December 31, 2015
|
$
|
(11
|
)
|
|
$
|
(108
|
)
|
|
$
|
(18
|
)
|
|
$
|
(137
|
)
|
Amounts reclassified from AOCI to interest expense
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Net unrealized gains on foreign currency translation
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
Other comprehensive loss related to equity method investee
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Net other comprehensive income (loss)
|
1
|
|
|
6
|
|
|
(1
|
)
|
|
6
|
|
Balances, March 31, 2016
|
$
|
(10
|
)
|
|
$
|
(102
|
)
|
|
$
|
(19
|
)
|
|
$
|
(131
|
)
|
AOCI attributable to noncontrolling interest
|
$
|
(10
|
)
|
|
$
|
(97
|
)
|
|
$
|
(19
|
)
|
|
$
|
(126
|
)
|
AOCI attributable to NEP
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
8. Related Party Transactions
Each project entered into O&M agreements and ASAs with subsidiaries of NEER whereby the projects pay a certain annual fee plus actual costs incurred in connection with certain O&M and administrative services performed under these agreements. These services are reflected as operations and maintenance in the condensed consolidated statements of income. Additionally, a NEP subsidiary pays an affiliate for transmission services which are reflected as operations and maintenance in the condensed consolidated statements of income. Certain projects have also entered into various types of agreements including those related to shared facilities and transmission lines, transmission line easements, technical support and construction coordination with subsidiaries of NEER whereby certain fees or cost reimbursements are paid to, or received by, certain subsidiaries of NEER.
Management Services Agreement
- Under the MSA, an indirect wholly owned subsidiary of NEE provides operational, management and administrative services to NEP, including managing NEP’s day to day affairs and providing individuals to act as NEP GP’s executive officers and directors, in addition to those services that are provided under the existing O&M agreements and ASAs described above between NEER subsidiaries and NEP subsidiaries. NEP OpCo pays NEE an annual management fee equal to the greater of
1%
of the sum of NEP OpCo’s net income plus interest expense, income tax expense and depreciation and amortization expense less certain non-cash, non-recurring items for the most recently ended fiscal year and
$4 million
(as adjusted for inflation
NEXTERA ENERGY PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
beginning in 2016), which is paid in quarterly installments with an additional payment each January to the extent
1%
of the sum of NEP OpCo’s net income plus interest expense, income tax expense and depreciation and amortization expense less certain non-cash, non-recurring items for the preceding fiscal year exceeds
$4 million
(as adjusted for inflation beginning in 2016). NEP OpCo also makes certain payments to NEE based on the achievement by NEP OpCo of certain target quarterly distribution levels to its unitholders. NEP’s O&M expenses for the
three
months ended
March 31, 2017
and
2016
include approximately
$16 million
and
$7 million
, respectively, related to the MSA.
Cash Sweep and Credit Support Agreement
- Effective July 1, 2014, NEP OpCo entered into a CSCS agreement with NEER under which NEER and certain of its subsidiaries may provide credit support in the form of letters of credit and guarantees to satisfy NEP’s subsidiaries’ contractual obligations. NEP OpCo will pay NEER an annual credit support fee based on the level and cost of the credit support provided, payable in quarterly installments. NEP’s O&M expenses for the
three
months ended
March 31, 2017
and
2016
include approximately
$1 million
and less than
$1 million
, respectively, related to the CSCS agreement.
NEER and certain of its subsidiaries may withdraw funds (Project Sweeps) received by NEP OpCo under the CSCS agreement, or its subsidiaries in connection with certain of the long-term debt agreements, and hold those funds in accounts belonging to NEER or its subsidiaries to the extent the funds are not required to pay project costs or otherwise required to be maintained by NEP's subsidiaries. NEER and its subsidiaries may keep the funds until the financing agreements permit distributions to be made, or, in the case of NEP OpCo, until such funds are required to make distributions or to pay expenses or other operating costs or NEP OpCo otherwise demands the return of such funds. If NEER fails to return withdrawn funds when required by NEP's subsidiaries’ financing agreements, the lenders will be entitled to draw on credit support provided by NEER in the amount of such withdrawn funds. If NEER or one of its affiliates realizes any earnings on the withdrawn funds prior to the return of such funds, it will be permitted to retain those earnings. The cash sweep amounts held in accounts belonging to NEER or its subsidiaries as of
March 31, 2017
and
December 31, 2016
were approximately
$97
million and
$65
million, respectively, and are included in due from related parties on the condensed consolidated balance sheets.
Guarantees and Letters of Credit Entered into by Related Parties
- Certain PPAs include requirements of the project entities to meet certain performance obligations. NEECH or NEER has provided letters of credit or guarantees for certain of these performance obligations and payment of any obligations from the transactions contemplated by the PPAs
.
In addition, certain of the financing agreements require cash and cash equivalents to be reserved for various purposes
.
In accordance with the terms of these financing agreements, guarantees from NEECH have been substituted in place of these cash and cash equivalents reserve requirements. Also, under certain financing agreements, indemnifications have been provided by NEECH. In addition, certain interconnection agreements and site certificates require letters of credit or a bond to secure certain payment or restoration obligations related to those agreements. NEECH also guarantees the Project Sweep amounts held in accounts belonging to NEER, as described above. As of
March 31, 2017
, NEECH or NEER guaranteed or provided indemnifications, letters of credit or bonds totaling approximately
$701 million
related to these obligations. Agreements related to the sale of differential membership interests require NEER to guarantee payment of construction-related expenses that were not yet paid before the sale of the differential membership interests in VIEs, as well as payments due by the VIEs and the indemnifications to the VIEs' respective investors. As of
March 31, 2017
, NEER guaranteed a total of approximately
$77 million
related to these obligations.
Due to Related Party
- Non-current amounts due to related party on the condensed consolidated balance sheets represent amounts owed by certain of NEP's wind projects to NEER to refund NEER for certain transmission costs paid on behalf of the wind projects. Amounts will be paid to NEER as the wind projects receive payments from third parties for related notes receivable recorded in other non-current assets on the condensed consolidated balance sheets.
Transportation and Fuel Management Agreements -
In connection with the acquisition of the Texas pipeline business, a subsidiary of NEP assigned to a subsidiary of NEER certain gas commodity agreements in exchange for entering into transportation agreements and a fuel management agreement whereby the benefits of the gas commodity agreements (net of transportation paid to the NEP subsidiary) are passed back to the NEP subsidiary. During the
three months ended March 31, 2017
and
2016
, NEP recognized approximately
$5 million
and
$4 million
, respectively, in revenues related to the transportation and fuel management agreements.
NEXTERA ENERGY PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
9. Summary of Significant Accounting and Reporting Policies
Revenue Recognition
- In May 2014, the Financial Accounting Standards Board (FASB) issued an accounting standards update 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. The standards update will be effective for NEP beginning January 1, 2018 with early adoption on January 1, 2017 permitted. The standards update may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective method).
NEP is currently reviewing individual contracts in order to determine the impact, if any, this standards update will have on its consolidated financial statements. A number of industry-specific implementation issues are still unresolved and the final resolution of certain of these issues could impact NEP's current accounting policies and/or revenue recognition patterns. NEP currently anticipates adopting this standards update on January 1, 2018 using the modified retrospective method.
Accounting for Partial Sales of Nonfinancial Assets -
In February 2017, the FASB issued an accounting standards update regarding the accounting for partial sales of nonfinancial assets. NEP anticipates adopting the standards update on January 1, 2018, concurrent with the FASB's new revenue recognition standard. The standards update may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as an adjustment to retained earnings as of the date of initial application. NEP is currently evaluating the effect the adoption of this standards update will have on its consolidated financial statements.
Property, Plant and Equipment - net
- NEP reviews the estimated useful lives of its fixed assets on an ongoing basis. NEP's most recent review indicated that the actual lives of certain equipment at its wind plants are expected to be longer than previously estimated for depreciation purposes. As a result, effective January 1, 2017, NEP changed the estimated useful lives of certain wind plant equipment from
30
years to
35
years to better reflect the period during which these assets are expected to remain in service. This change increased net income attributable to NEP by approximately
$1 million
and increased basic and diluted earnings per unit attributable to NEP by approximately
$0.02
for the three months ended March 31, 2017. For the year ended December 31, 2017, the change is expected to increase net income attributable to NEP by approximately
$4 million
.
10. Commitments and Contingencies
Land Use Commitments -
The project owners are parties to various agreements that provide for payments to landowners for the right to use the land upon which the projects are located. These leases and easements can typically be renewed by the project owners for various periods. The annual fees range from minimum rent payments varying by lease to maximum rent payments of a certain percentage of gross revenues, varying by lease. Total lease expense was approximately
$6 million
and
$5 million
for the
three months ended March 31, 2017
and
2016
, respectively, and is included in operations and maintenance expenses in the condensed consolidated statements of income.
The total minimum non-cancelable rental commitments at
March 31, 2017
under these land use agreements are as follows:
|
|
|
|
|
|
|
|
Land Use
Commitments
|
|
|
(millions)
|
Remainder of 2017
|
|
$
|
7
|
|
2018
|
|
10
|
|
2019
|
|
10
|
|
2020
|
|
10
|
|
2021
|
|
10
|
|
Thereafter
|
|
337
|
|
Total minimum land use payments
|
|
$
|
384
|
|
One of NEP’s solar project's land leases includes a right-of-way lease/grant that provides for payments to the BLM for the right to use the public lands upon which the project is located. The lease may be renewed at expiration at the solar project's option and will be subject to the regulations existing at the time of renewal. In connection with the terms of this lease, the solar project obtained a surety bond from a non-affiliated party in favor of the BLM for approximately
$23 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. Certain varying lease payments are considered contingent rent and, therefore, expense is recognized as incurred.
NEXTERA ENERGY PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
(unaudited)
Development, Engineering and Construction Commitments -
At
March 31, 2017
, the Texas pipelines had several open engineering, procurement and construction contracts related to the procurement of materials and services. Those contracts have varying payment terms and some include performance obligations that allow the Texas pipelines to receive liquidated damages if the contractor does not perform. As of
March 31, 2017
, the Texas pipelines purchased approximately
$4 million
under these contracts, for which costs have been capitalized in construction work in progress which is included in property, plant and equipment - net on the condensed consolidated balance sheet. As of
March 31, 2017
, the Texas pipelines have remaining commitments under these contracts of approximately
$10 million
.
Letter of Credit Facilities -
Two of NEP’s projects entered into letter of credit (LOC) facilities under which the LOC lenders may issue standby letters of credit not to exceed approximately
$119 million
in the aggregate. These LOC facilities have maturity dates of August 2017 and June 2022. Approximately
$93 million
of LOCs are outstanding as of
March 31, 2017
primarily related to debt service reserves and security for certain of the projects' agreements, including a PPA.
Canadian FIT Contracts
-The FIT contracts relating to NEP's wind projects located in Canada (Canadian projects) require suppliers to source a minimum percentage of their equipment and services from Ontario resident suppliers to meet the minimum required domestic content level (MRDCL). The MRDCL for
two
projects is
25%
and the MRDCL for the other
two
projects is
50%
. Following their respective CODs, the Canadian projects submitted reports to the Independent Electricity System Operator (IESO) summarizing how they achieved the MRDCL for their respective projects (domestic content reports) and the IESO issued letters to the Canadian projects acknowledging the completeness of their domestic content reports. The IESO has the right to audit the Canadian projects for a period of up to
7 years
post-COD to confirm that they complied with the domestic content requirements under their respective FIT contracts and achieved their respective MRDCLs. The failure by any of these projects to achieve its MRDCL could result in a default by such project under its FIT contract, which default may not be possible to cure and could result in a termination of its FIT contract, without compensation, by the IESO. A termination of the FIT contract for any of these Canadian projects could negatively affect revenues generated by such project and have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.
Acquisition Holdback
- At
December 31, 2016
, the condensed consolidated balance sheets included an acquisition holdback related to the satisfaction of any indemnification obligations of the Texas pipelines sellers through April 2017 (indemnity holdback). During the
three months ended March 31, 2017
, the indemnity holdback was released under the terms of the Texas pipelines acquisition agreement and approximately
$200 million
was paid to the sellers.