XPLR Infrastructure, LP quarterly report, Q3 FY2014

Business context and reporting period

This is NextEra Energy Partners, LP’s unaudited Form 10-Q for the quarter ended September 30, 2014—not a filing bearing the name XPLR Infrastructure, LP in the supplied text. NEP was formed in 2014 and completed its IPO on July 1, 2014. It owns a controlling general-partner interest and a 20.1% limited-partner interest in NEP OpCo; NEE Equity holds the remaining 79.9% limited-partner interest. Its initial portfolio comprised ten contracted wind and solar projects totaling 989.6 MW.

Financial results and position

Revenue and operating income rose mainly because Summerhaven, Genesis Solar units 1 and 2, and Bluewater entered service after the prior-year comparison period. Generation was 541 GWh in Q3 2014 versus 283 GWh; for nine months, 2,025 GWh versus 1,300 GWh. The nine-month comparisons include predecessor-period results before the IPO and are not fully comparable with NEP’s post-IPO results.

For the nine months, operating cash flow was $122 million, compared with $58 million. Investing cash flow was $(240) million and financing cash flow was $211 million; cash increased $91 million to $118 million. Investing activity included $306 million of convertible investment tax credit proceeds, a $288 million subsidiary-interest acquisition, and $143 million net payments under the related-party cash sweep. Cash paid for interest was $53 million.

At September 30, 2014, total assets were $2.775 billion, total liabilities $2.029 billion, and partners’/members’ equity $746 million. Long-term debt including current maturities was $1.857 billion. Current assets were $374 million and current liabilities $166 million. Reported liquidity was $369 million, comprising $118 million cash, a $250 million revolving facility, and $1 million of remaining availability under an $83 million letter-of-credit facility after $82 million was outstanding. The $182 million due from related parties included funds held by NEER under the cash-sweep arrangement, not cash directly held by NEP.

Material changes and unusual items

• Q3 operating expenses increased to $37 million from $19 million, including higher operations and maintenance and depreciation as additional projects entered service.
• Nine-month interest expense increased to $68 million from $30 million, primarily reflecting new project debt and reduced capitalized interest as construction completed.
• The 2014 nine-month results include $13 million income tax expense; the filing cautions that tax accounting changed after the IPO, limiting comparison with 2013.
• The filing reports an immaterial correction to 2013 income tax expense, other comprehensive loss, and deferred tax liabilities; it says the correction did not affect cash flows.
• NEP raised approximately $438 million net from its July IPO. It used approximately $288 million to acquire NEP OpCo units from NEE Equity; approximately $150 million was contributed to NEP OpCo for general purposes, including future acquisitions.

Outlook, risks, and contingencies

Management stated that cash on hand, operating cash flow, and existing or anticipated financing were expected to meet near- and long-term capital needs. This is not a quantified earnings or distribution forecast. NEP’s partnership agreement provides for quarterly distributions of available cash; the minimum quarterly distribution was $0.1875 per common unit, subject to the agreement’s terms and available cash. Project output, weather, maintenance, reserves, and debt restrictions can make cash available for distribution variable.

In October 2014, subsidiaries agreed to acquire Palo Duro, an approximately 250 MW wind project under construction, for about $227 million, and Shafter, an approximately 20 MW solar project under construction, for about $64 million. Both were expected to close in Q1 2015, subject to conditions, and were intended to be funded with cash and revolving-facility draws.

Key exposures include weather and project performance, turbine output below manufacturer estimates at certain projects, reliance on contracted counterparties and third-party transmission, changing renewable-energy incentives, interest-rate and currency movements, and dependence on NEE and its affiliates. NEP’s revolving facility was $250 million, matures in July 2019, and had no borrowings as of November 11, 2014. Project financings impose covenants and distribution tests; the filing says subsidiaries were compliant and debt-service coverage ratios met or exceeded 1.20:1.00.

A significant control issue was disclosed: management concluded disclosure controls were not effective at a reasonable assurance level because of a material weakness in accounting for income taxes, including deferred-tax valuation allowances. Remediation steps were underway but had not yet been validated. Contractual obligations totaled $3.163 billion, including debt with interest, asset-retirement obligations, and land leases. The filing also reports $82 million of letters of credit outstanding and a $23 million surety bond for the Genesis Solar project.

Important facts for investors to verify

• Confirm issuer identity: the supplied filing is for NextEra Energy Partners, LP, not XPLR Infrastructure, LP.
• Distinguish consolidated net income from NEP-attributable income and account for the July 1 IPO and predecessor/successor reporting change.
• Assess whether the $182 million related-party cash-sweep balance is returned when required and understand NEER’s credit-support obligations and the terms governing those funds.
• Verify progress, funding, closing conditions, and construction risks for the Palo Duro and Shafter acquisitions.
• Track remediation and validation of the disclosed material weakness in income-tax controls.
• Review project-level debt covenants, distribution restrictions, interest-rate hedges, and the availability of reported liquidity after letters of credit and other commitments.