Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________________________
 
FORM 10-Q
___________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended August 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____

Commission File Number: 001-37447
__________________________________________________
8point3 Energy Partners LP
(Exact Name of Registrant as Specified in its Charter)
__________________________________________________
 
Delaware
47-3298142
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
77 Rio Robles
San Jose, California
95134
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (408) 240-5500
_______________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
 
Accelerated filer ☒
 
Non-accelerated filer
 
Small reporting company
 
Emerging growth company ☒
 
 
 
 
(Do not check if a
small reporting company)
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒
As of October 2, 2017, the registrant had outstanding 28,084,935 Class A shares representing limited partner interests and 51,000,000 Class B shares representing limited partner interests.
 




Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 


i



GLOSSARY

References in this Quarterly Report on Form 10-Q to:

“2016 10-K” refers to our Annual Report on Form 10-K dated January 26, 2017, as amended.

“(ac)” refers to alternating current.

“AMAs” refers to asset management agreements.

“AROs” refers to asset retirement obligations.

“ATM Program” refers to the Partnership’s at-the-market offering program established on January 30, 2017 under the Equity Distribution Agreement by and among the Partnership and the General Partner, on the one hand, and Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Mizuho Securities USA Inc. (collectively, the “ATM Agents”), on the other hand, under which the Partnership may sell its Class A Shares from time to time to or through the ATM Agents.

“Blackwell Project” refers to the solar energy project located in Kern County, California, that is held by the Blackwell Project Entity and has a nameplate capacity of 12 MW.

“Blackwell Project Entity” refers to Blackwell Solar, LLC.

“C&I” refers to commercial and industrial.

“C&I Holdings” refers to SunPower Commercial Holding Company I, LLC, an indirect subsidiary of OpCo and the holder of the Macy’s California Project Entities and the UC Davis Project Entity.

“C&I Project Entities” refers to, collectively, the Kern Project Entity, the Macy’s California Project Entities, the Macy’s Maryland Project Entity and the UC Davis Project Entity.

“COD” refers to the commercial operation date.

“DG Solar” refers to distributed solar generation. DG Solar systems are deployed at the site of end-use, such as businesses and homes.

“EPC” refers to engineering, procurement and construction.

“Exchange Act” refers to the Securities Exchange Act of 1934, as amended.

“FASB” refers to the Financial Accounting Standards Board.

“First Solar” refers to First Solar, Inc., a corporation formed under the laws of the State of Delaware, in its individual capacity or to First Solar, Inc. and its subsidiaries, as the context requires. Unless otherwise specifically noted, references to First Solar and its subsidiaries exclude us, the General Partner, Holdings and our subsidiaries, including OpCo.

“First Solar MSA” refers to the Management Services Agreement, dated as of June 24, 2015, as amended, among the Partnership, OpCo, the General Partner and First Solar 8point3 Management Services, LLC.

“First Solar ROFO Agreement” refers to the Right of First Offer Agreement, dated as of June 24, 2015, as amended, by and between OpCo and First Solar.

“First Solar ROFO Projects” refers to, collectively, the projects set forth in the chart in Part I, Item 1 of the 2016 10-K, under the heading “Business—Our Portfolio—ROFO Projects” with First Solar listed as the “Developing Sponsor” and as to which we have a right of first offer under the First Solar ROFO Agreement should First Solar decide to sell them (but excluding (a) the Stateline Project, which we acquired on December 1, 2016, as further described in Part I, Item 1. “Financial Information—Notes to Unaudited Condensed Consolidated Financial Statements—Note 3—Investment in Unconsolidated Affiliates," (b) First Solar’s indirect interest in the Switch Station project, as further described in Part I, Item 1. “Financial Information—Notes to Unaudited Condensed Consolidated Financial Statements—Note 12—Related Parties,” (c) First Solar’s indirect interest in the Cuyama project, as further described in Part I, Item 1. “Financial Information—Notes to Unaudited Condensed

2



Consolidated Financial Statements—Note 12—Related Parties,” and (d) First Solar’s indirect interest in the California Flats project, as further described in Part I, Item 1.“Financial Information—Notes to Unaudited Condensed Consolidated Financial Statements—Note 12—Related Parties”.

“General Partner” or “our general partner” refers to 8point3 General Partner, LLC, our general partner, a limited liability company formed under the laws of the State of Delaware and a wholly-owned subsidiary of Holdings.

“GW” refers to a gigawatt, or 1,000,000,000 watts. As used in this Quarterly Report on Form 10-Q, all references to watts (e.g., MW or GW) refer to measurements of alternating current, except where otherwise noted.

“Henrietta Holdings” refers to Parrey Holding Company, LLC.

“Henrietta Project” refers to the solar energy project that is located in Kings County, California and is held by the Henrietta Project Entity.

“Henrietta Project Entity” refers to Parrey, LLC.

“HLBV Method” refers to Hypothetical Liquidation at Book Value Method.

“Holdings” refers to 8point3 Holding Company, LLC, a limited liability company formed under the laws of the State of Delaware, which is jointly owned by First Solar and SunPower and is the parent of the General Partner.

“Hooper Project” refers to the solar energy project located in Alamosa County, Colorado, that is held by the Hooper Project Entity and has a nameplate capacity of 50 MW.

“Hooper Project Entity” refers to Solar Star Colorado III, LLC.

“IPO” refers to the Partnership’s initial public offering of its Class A shares, which was completed on June 24, 2015.

“IPO First Solar Project Entities” refers to the Lost Hills Project Entity, the Blackwell Project Entity, the Maryland Solar Project Entity, the North Star Project Entity and the Solar Gen 2 Project Entity and, with respect to certain of the foregoing, one or more of its direct or indirect holding companies.

“IPO Project Entities” refers to, collectively, the IPO First Solar Project Entities and the IPO SunPower Project Entities.

“IPO SunPower Project Entities” refers to the Macy’s California Project Entities, the Quinto Project Entity, the RPU Project Entity, the UC Davis Project Entity and the Residential Portfolio Project Entity and, with respect to certain of the foregoing, one or more of its direct or indirect holding companies.

“ITCs” refers to investment tax credits.

“Kern Class B Partnership” refers to SunPower Commercial II Class B, LLC.

“Kern Letter Agreement” refers to that certain letter agreement, dated June 9, 2017, by and between OpCo and SunPower in connection with the closing of the fifth phase of the Kern Project. Please read Part I, Item 1. “Financial Information—Notes to Unaudited Condensed Consolidated Financial Statements—Note 2—Business Combinations” for further details.

“Kern Phase 1(a) Assets” refers to the assets comprising the first phase of the Kern Project, with a nameplate capacity of approximately 3 MW.

“Kern Phase 1(b) Assets” refers to the assets comprising the second phase of the Kern Project, with a nameplate capacity of approximately 5 MW.

“Kern Phase 2(a) Assets” refers to the assets comprising the third phase of the Kern Project, with a nameplate capacity of approximately 5 MW.

“Kern Phase 2(b) Assets” refers to the assets comprising the fourth phase of the Kern Project, with a nameplate capacity of approximately 3 MW.

3




“Kern Phase 2(c) Assets” refers to the assets comprising the fifth phase of the Kern Project, with a nameplate capacity of up to approximately 2 MW.

“Kern Purchase Agreement" refers to the Purchase, Sale and Contribution Agreement, dated as of January 26, 2016, between OpCo and SunPower, as amended.

“Kern Remaining Assets” refers to the certain assets of the Kern Project, with a nameplate capacity of up to approximately 3 MW, which may be acquired by the Partnership if certain conditions precedent set forth in the Kern Letter Agreement are satisfied.
 
“Kern Project” refers to the solar energy project located in Kern County, California, that is held by the Kern Project Entity and has an aggregate nameplate capacity of up to approximately 21 MW. OpCo’s acquisition of the Kern Project is being effectuated in phases, with the closing for the Kern Phase 1(a) Assets having occurred on January 26, 2016 (the “Kern Phase 1(a) Acquisition”), the closing for the Kern Phase 1(b) Assets having occurred on September 9, 2016 (the “Kern Phase 1(b) Acquisition”), the closing for the Kern Phase 2(a) Assets having occurred on November 30, 2016 (the “Kern Phase 2(a) Acquisition”), the closing for the Kern Phase 2(b) Assets having occurred on February 24, 2017 (the “Kern Phase 2(b) Acquisition”), and the closing for the Kern Phase 2(c) Assets having occurred on June 9, 2017 (the “Kern Phase 2(c) Acquisition”), and in the event that the conditions precedent set forth in the Kern Letter Agreement are met, the closing for the Kern Remaining Assets at a future closing date on or prior to September 30, 2017.

“Kern Project Entity” refers to Kern High School District Solar (2), LLC.

“Kingbird Project” refers to the solar energy project located in Kern County, California, that is held by the Kingbird Project Entities and has an aggregate nameplate capacity of 40 MW.

“Kingbird Project Entities” refers to, collectively, Kingbird Solar A, LLC and Kingbird Solar B, LLC.

“Lost Hills Blackwell Holdings” refers to Lost Hills Blackwell Holdings, LLC.

“Lost Hills Blackwell Project” refers to the solar energy project held collectively by the Lost Hills Project Entity and the Blackwell Project Entity that is comprised of the Lost Hills Project and the Blackwell Project and has a nameplate capacity of 32 MW.

“Lost Hills Project” refers to the solar energy project located in Kern County, California, that is held by the Lost Hills Project Entity and has a nameplate capacity of 20 MW.

“Lost Hills Project Entity” refers to Lost Hills Solar, LLC.

“Macy’s California Project” refers to the solar energy project consisting of seven sites in Northern California that is held by the Macy’s California Project Entities and has an aggregate nameplate capacity of 3 MW.

“Macy’s California Project Entities” refers to, collectively, Solar Star California XXX, LLC and Solar Star California XXX (2), LLC.

“Macy’s Maryland Project” refers to the solar energy project which holds roof-mounted solar photovoltaic systems with an aggregate system size of approximately 5 MW, which was installed at certain Macy’s department stores in Maryland and is held by the Macy’s Maryland Project Entity.

“Macy’s Maryland Project Entity” refers to Northstar Macys Maryland 2015, LLC.

“Maryland Solar Project” refers to the solar energy project located in Washington County, Maryland, that is held by the Maryland Solar Project Entity and has a nameplate capacity of 20 MW.

“Maryland Solar Project Entity” refers to Maryland Solar LLC.

“MSAs” refers, collectively, to the First Solar MSA and the SunPower MSA.


4



“MW” refers to a megawatt, or 1,000,000 watts. As used in this Quarterly Report on Form 10-Q, all references to watts (e.g., MW or GW) refer to measurements of alternating current, except where otherwise noted.

“North Star Holdings” refers to NS Solar Holdings, LLC.

“North Star Project” refers to the solar energy project located in Fresno County, California, that is held by the North Star Project Entity and has a nameplate capacity of 60 MW.

“North Star Project Entity” refers to North Star Solar, LLC.

“NPV” refers to net present value.

“O&M” refers to operations and maintenance services.

“offtake agreements” refers to PPAs, leases and other offtake agreements.

“offtake counterparties” refers to the customer under a PPA lease or other offtake agreement.

“Omnibus Agreement” refers to the Amended and Restated Omnibus Agreement, dated as of April 6, 2016, as amended, among the Partnership, OpCo, the General Partner, Holdings, First Solar and SunPower. Please read Part I, Item 1. “Financial Information—Notes to Unaudited Condensed Consolidated Financial Statements—Note 12—Related Parties” for further details.

“OpCo” refers to 8point3 Operating Company, LLC and its subsidiaries.

“PG&E” refers to Pacific Gas and Electric Company.

“Portfolio” refers to, collectively, our portfolio of solar energy projects as of August 31, 2017, which consists of the Henrietta Project, the Hooper Project, the Kern Phase 1(a) Assets, the Kern Phase 1(b) Assets, the Kern Phase 2(a) Assets, the Kern Phase 2(b) Assets, the Kern Phase 2(c) Assets, the Kingbird Project, the Lost Hills Blackwell Project, the Macy’s California Project, the Macy’s Maryland Project, the Maryland Solar Project, the North Star Project, the Quinto Project, the Solar Gen 2 Project, the Stateline Project, the RPU Project, the UC Davis Project and the Residential Portfolio.

“PPA” refers to a power purchase agreement.

“Predecessor” refers to the operation of the IPO SunPower Project Entities prior to the completion of the IPO.

“Project Entities” refers to, collectively, the IPO First Solar Project Entities, the IPO SunPower Project Entities, the Henrietta Project Entity, the Hooper Project Entity, the Kern Project Entity, the Kingbird Project Entities, the Macy’s Maryland Project Entity and the Stateline Project Entity.

“Quinto Holdings” refers to SSCA XIII Holding Company, LLC, an indirect subsidiary of OpCo and the indirect holder of the Quinto Project Entity.

“Quinto Project” refers to the solar energy project located in Merced County, California, that is held by the Quinto Project Entity and has a nameplate capacity of 108 MW.

“Quinto Project Entity” refers to Solar Star California XIII, LLC.

“Residential Portfolio” refers to the approximately 5,800 solar installations located at homes in Arizona, California, Colorado, Hawaii, Massachusetts, New Jersey, New York, Pennsylvania and Vermont, that is held by the Residential Portfolio Project Entity and has an aggregate nameplate capacity of 38 MW.

“Residential Portfolio Project Entity” refers to SunPower Residential I, LLC.

“ROFO Projects” refers to, collectively, the First Solar ROFO Projects and the SunPower ROFO Projects.


5



“RPS” refers to renewable portfolio standards mandated by state law that require a regulated retail electric utility to procure a specified percentage of its total electricity delivered to retail customers in the state from eligible renewable energy resources, such as solar energy projects, by a specified date.

“RPU Holdings” refers to SSCA XXXI Holding Company, LLC, an indirect subsidiary of OpCo and the holder of the RPU Project Entity.

“RPU Project” refers to the solar energy project located in Riverside, California, that is held by the RPU Project Entity and has a nameplate capacity of 7 MW.

“RPU Project Entity” refers to Solar Star California XXXI, LLC.

“SDG&E” refers to San Diego Gas & Electric Company.

“SG&A” refers to selling, general and administrative services.

“SG2 Holdings” refers to SG2 Holdings, LLC.

“Solar Gen 2 Project” refers to the solar energy project located in Imperial County, California, that is held by the Solar Gen 2 Project Entity and has a nameplate capacity of 150 MW.

“Solar Gen 2 Project Entity” refers to SG2 Imperial Valley, LLC.

“Sponsors” refers, collectively, to First Solar and SunPower.

“SRECs” refers to Solar Renewable Energy Credits.

“Stateline Project” refers to the solar energy project located in San Bernardino, California that is held by the Stateline Project Entity and has a nameplate capacity of 300 MW.

“Stateline Project Entity” refers to Desert Stateline, LLC.

“Stateline Promissory Note” means the Promissory Note in the principal amount of $50.0 million issued by OpCo in favor of First Solar Asset Management, LLC, a wholly-owned subsidiary of First Solar, in connection with our acquisition of interests in the Stateline Project.

“SunPower” refers to SunPower Corporation, a corporation formed under the laws of the State of Delaware, in its individual capacity or to SunPower Corporation and its subsidiaries, as the context requires. Unless otherwise specifically noted, references to SunPower and its subsidiaries exclude us, the General Partner, Holdings and our subsidiaries, including OpCo.

“SunPower Capital” refers to SunPower Capital Services, LLC, a wholly owned subsidiary of SunPower.

“SunPower MSA” refers to the Management Services Agreement, dated as of June 24, 2015, as amended, among the Partnership, OpCo, the General Partner and SunPower Capital.

“SunPower ROFO Agreement” refers to the Right of First Offer Agreement, dated as of June 24, 2015, as amended, by and between OpCo and SunPower.

“SunPower ROFO Projects” refers to, collectively, the projects set forth in the chart in Part I, Item 1 of the 2016 10-K, under the heading “Business—Our Portfolio—ROFO Projects” with SunPower listed as the Developing Sponsor and as to which we have a right of first offer under the SunPower ROFO Agreement should SunPower decide to sell them (but excluding SunPower’s interest in the El Pelicano project, as further described in Part I, Item 1. “Financial Information—Notes to Unaudited Condensed Consolidated Financial Statements—Note 12—Related Parties”, and SunPower's interest in the Boulder Solar 1 project, as further described in Part I, Item 1. “Financial Information—Notes to Unaudited Condensed Consolidated Financial Statements—Note 12—Related Parties”).

“UC Davis Project” refers to the solar energy project located in Solano County, California, that is held by the UC Davis Project Entity and has a nameplate capacity of 13 MW.

6




“UC Davis Project Entity” refers to Solar Star California XXXII, LLC.

“U.S. GAAP” refers to U.S. generally accepted accounting principles.

“Utility Project Entities” refers to the Henrietta Project Entity, the Hooper Project Entity, the Kingbird Project Entities, the Lost Hills Project Entity, the Blackwell Project Entity, the Maryland Solar Project Entity, the North Star Project Entity, the Quinto Project Entity, the RPU Project Entity, the Solar Gen 2 Project Entity and the Stateline Project Entity.


7



PART I—FINANCIAL INFORMATION
 
Item 1. Financial Statements.

8point3 Energy Partners LP
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)

 
 
August 31, 2017
 
November 30, 2016
Assets
 
 

 
 
Current assets:
 
 

 
 
Cash and cash equivalents
 
$
10,361

 
$
14,261

Accounts receivable and short-term financing receivables, net
 
10,882

 
5,401

Prepaid and other current assets1
 
12,312

 
15,745

Total current assets
 
33,555

 
35,407

Property and equipment, net
 
719,868

 
720,132

Long-term financing receivables, net
 
77,484

 
80,014

Investments in unconsolidated affiliates
 
791,985

 
475,078

Other long-term assets
 
21,459

 
24,432

Total assets
 
$
1,644,351

 
$
1,335,063

Liabilities and Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable and other current liabilities1
 
$
6,565

 
$
23,771

Short-term debt and financing obligations1
 
2,201

 
1,964

Deferred revenue, current portion
 
1,527

 
870

Total current liabilities
 
10,293

 
26,605

Long-term debt and financing obligations1
 
709,989

 
384,436

Deferred revenue, net of current portion
 
128

 
308

Deferred tax liabilities
 
38,591

 
30,733

Asset retirement obligations
 
14,796

 
13,448

Other long-term liabilities
 
1,853

 

Total liabilities
 
775,650

 
455,530

Redeemable noncontrolling interests
 
17,346

 
17,624

Commitments and contingencies (Note 5)
 


 


Equity:
 
 

 
 

Class A shares, 28,084,935 and 28,072,680 issued and outstanding as of August 31, 2017 and November 30, 2016, respectively
 
249,306

 
249,138

Class B shares, 51,000,000 issued and outstanding as of August 31, 2017 and November 30, 2016
 

 

Accumulated earnings
 
12,550

 
22,440

Total shareholders' equity attributable to 8point3 Energy Partners LP
 
261,856

 
271,578

Noncontrolling interests
 
589,499

 
590,331

Total equity
 
851,355

 
861,909

Total liabilities and equity
 
$
1,644,351

 
$
1,335,063


1
The Partnership has related-party balances for transactions made with the Sponsors and tax equity investors. Related-party balances recorded within “Prepaid and other current assets” in the unaudited condensed consolidated balance sheets were $0.8 million and $0.9 million as of August 31, 2017 and November 30, 2016, respectively. Related-party balances recorded within “Accounts payable and other current liabilities” in the unaudited condensed consolidated balance sheets were $3.5 million and $19.7 million due to Sponsors as of August 31, 2017 and November 30, 2016, respectively, and $0.9 million and $1.0 million due to tax equity investors as of August 31, 2017 and November 30, 2016, respectively. Related-party balances recorded within “Short-term debt and financing obligations” and “Long-term debt and financing obligations” in the unaudited condensed consolidated balance sheets were $2.2 million and $47.8 million, respectively, as of August 31, 2017, and $2.0 million and zero, respectively, as of November 30, 2016.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


8



8point3 Energy Partners LP
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
August 31, 2017
 
August 31, 2016
 
August 31, 2017
 
August 31, 2016
Revenues:
 
 
 
 
 

 
 

Operating revenues1
$
27,744

 
$
26,116

 
$
54,319

 
$
46,735

Total revenues
27,744

 
26,116

 
54,319

 
46,735

Operating costs and expenses1:
 
 
 
 
 

 
 

Cost of operations
2,064

 
1,928

 
6,396

 
4,953

Selling, general and administrative
2,050

 
1,804

 
5,894

 
5,096

Depreciation and accretion
7,220

 
6,311

 
20,875

 
16,325

Acquisition-related transaction costs
19

 
599

 
50

 
2,261

Total operating costs and expenses
11,353

 
10,642

 
33,215

 
28,635

Operating income
16,391

 
15,474

 
21,104

 
18,100

Other expense (income):
 
 
 
 
 

 
 

Interest expense
6,060

 
3,199

 
17,429

 
9,123

Interest income
(304
)
 
(296
)
 
(869
)
 
(909
)
Other expense (income)
283

 
(291
)
 
(514
)
 
(551
)
Total other expense, net
6,039

 
2,612

 
16,046

 
7,663

Income before income taxes and equity in earnings of unconsolidated investees
10,352

 
12,862

 
5,058

 
10,437

Income tax provision
(5,012
)
 
(5,063
)
 
(7,860
)
 
(15,281
)
Equity in earnings of unconsolidated investees
23,322

 
8,075

 
33,287

 
13,504

Net income
28,662

 
15,874

 
30,485

 
8,660

Less: Net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests
21,189

 
8,281

 
18,765

 
(14,263
)
Net income attributable to 8point3 Energy Partners LP Class A shares
$
7,473

 
$
7,593

 
$
11,720

 
$
22,923

Net income per Class A share:
 
 
 
 
 

 
 

Basic
$
0.27

 
$
0.38

 
$
0.42

 
$
1.15

Diluted
$
0.27

 
$
0.38

 
$
0.42

 
$
1.15

Distributions per Class A share:
$
0.26

 
$
0.23

 
$
0.77

 
$
0.67

Weighted average number of Class A shares:
 
 
 
 
 

 
 

Basic
28,081

 
20,015

 
28,077

 
20,011

Diluted
43,581

 
35,515

 
43,577

 
35,511

 
1
The Partnership has related-party activities for transactions made with the Sponsors. Related party transactions recorded within “Operating revenues” in the unaudited condensed consolidated statement of operations were $1.3 million for each of the three months ended August 31, 2017 and August 31, 2016, and $3.9 million for each of the nine months ended August 31, 2017 and August 31, 2016. Related party transactions recorded within “Operating costs and expenses” in the unaudited condensed consolidated statement of operations were $2.1 million and $1.9 million for the three months ended August 31, 2017 and August 31, 2016, respectively, and $6.3 million and $5.0 million for the nine months ended August 31, 2017 and August 31, 2016, respectively.

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


9



8point3 Energy Partners LP
Condensed Consolidated Statements of Redeemable Noncontrolling Interests and Equity
(In thousands, except share data)
(Unaudited)
 
 
Redeemable
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
Noncontrolling
 
Class A Shares
 
Class B Shares
 
Accumulated
 
Shareholders'
 
Noncontrolling
 
Total
 
Interests
 
Shares
 
Amount
 
Shares
 
Amount
 
Earnings
 
Equity
 
Interest
 
Equity
Balance as of November 30, 2015
$
89,747

 
20,007,281

 
$
392,748

 
51,000,000

 
$

 
$
15,580

 
$
408,328

 
$
194,058

 
$
602,386

Noncontrolling interests obtained through acquisition

 

 

 

 

 

 

 
40,128

 
40,128

Cash and accrued distributions to noncontrolling interests - tax equity investors
(3,580
)
 

 

 

 

 

 

 
(3,574
)
 
(3,574
)
Issuance of Class A shares, net of issuance costs

 
8,050,000

 
113,325

 

 

 

 
113,325

 

 
113,325

Reclassification of noncontrolling interests due to issuance of Class A shares

 

 
(257,159
)
 

 

 

 
(257,159
)
 
257,159

 

Share-based compensation

 
15,399

 
224

 

 

 

 
224

 

 
224

Contributions from SunPower

 

 

 

 

 

 

 
9,973

 
9,973

Contributions from tax equity investors

 

 

 

 

 

 

 
50,507

 
50,507

Cash distributions to Class A shareholders

 

 

 

 

 
(20,241
)
 
(20,241
)
 

 
(20,241
)
Cash distributions to Sponsors as OpCo unitholders

 

 

 

 

 

 

 
(12,271
)
 
(12,271
)
Net income (loss)
(68,543
)
 

 

 

 

 
27,101

 
27,101

 
54,351

 
81,452

Balance as of November 30, 2016
$
17,624

 
28,072,680

 
$
249,138

 
51,000,000

 
$

 
$
22,440

 
$
271,578

 
$
590,331

 
$
861,909

Noncontrolling interests obtained through acquisition

 

 

 

 

 

 

 
1,736

 
1,736

Cash and accrued distributions to noncontrolling interests - tax equity investors
(2,671
)
 

 

 

 

 

 

 
(4,037
)
 
(4,037
)
Share-based compensation

 
12,255

 
168

 

 

 

 
168

 

 
168

Contributions from tax equity investors

 

 

 

 

 

 

 
24,353

 
24,353

Cash distributions to Class A shareholders

 

 

 

 

 
(21,610
)
 
(21,610
)
 

 
(21,610
)
Cash distributions to Sponsors as OpCo unitholders

 

 

 

 

 

 

 
(39,255
)
 
(39,255
)
Net income
2,393

 

 

 

 

 
11,720

 
11,720

 
16,371

 
28,091

Balance as of August 31, 2017
$
17,346

 
28,084,935

 
$
249,306

 
51,000,000

 
$

 
$
12,550

 
$
261,856

 
$
589,499

 
$
851,355

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


10



8point3 Energy Partners LP
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
Nine Months Ended
 
 
August 31, 2017
 
August 31, 2016
Cash flows from operating activities:
 
 
 
 
Net income
 
$
30,485

 
$
8,660

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
21,198

 
16,325

Unrealized gain on interest rate swap
 
(349
)
 
(536
)
Distributions from unconsolidated investees
 
32,892

 
15,130

Equity in earnings of unconsolidated investees
 
(33,287
)
 
(13,504
)
Deferred income taxes
 
7,858

 
15,281

Share-based compensation
 
168

 
168

Amortization of debt issuance costs
 
737

 
442

Other, net
 
1

 
270

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable and financing receivable, net
 
(2,830
)
 
(4,290
)
Prepaid and other assets
 
6,170

 
(1,398
)
Deferred revenue
 
482

 
467

Accounts payable and other liabilities
 
734

 
806

Net cash provided by operating activities
 
64,259

 
37,821

Cash flows from investing activities:
 


 
 
Cash provided by (used in) purchases of property and equipment, net
 
(314
)
 
1,415

Cash paid for acquisitions
 
(313,183
)
 
(124,326
)
Distributions from unconsolidated investees
 
13,575

 
653

Net cash used in investing activities
 
(299,922
)
 
(122,258
)
Cash flows from financing activities:
 


 
 
Proceeds from issuance of Class A shares, net of issuance costs
 

 
(201
)
Proceeds from issuance of bank loans, net of issuance costs
 
283,999

 
64,991

Repayment of bank loans
 
(7,000
)
 

Repayment of promissory note to First Solar
 
(1,964
)
 

Capital contributions from SunPower
 

 
9,973

Cash distribution to Class A shareholders
 
(21,610
)
 
(13,487
)
Cash distributions to Sponsors as OpCo unit holders
 
(39,255
)
 

Cash contributions from noncontrolling interests and redeemable noncontrolling interests - tax equity investors
 
24,353

 
372

Cash distributions to noncontrolling interests and redeemable noncontrolling interests - tax equity investors
 
(6,760
)
 
(4,102
)
Net cash provided by financing activities
 
231,763

 
57,546

Net decrease in cash and cash equivalents
 
(3,900
)
 
(26,891
)
Cash and cash equivalents, beginning of period
 
14,261

 
56,781

Cash and cash equivalents, end of period
 
$
10,361

 
$
29,890

Non-cash transactions:
 


 
 
Issuance by OpCo of promissory note to First Solar in connection with the Stateline Acquisition
 
$
50,000

 
$

Property and equipment acquisitions funded by liabilities
 
2,618

 
17,410

Settlement of related party payable by capital contribution from tax equity investor
 

 
46,837

Accrued distributions to noncontrolling interests and redeemable noncontrolling interests - tax equity investors
 
923

 
795

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

11



8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Description of Business

The Partnership

8point3 Energy Partners LP (together with its subsidiaries, the “Partnership”) is a limited partnership formed on March 3, 2015 under a master formation agreement by SunPower Corporation (“SunPower”) and First Solar, Inc. (“First Solar” and, together with SunPower, the “Sponsors”) to own, operate and acquire solar energy generation systems. As of August 31, 2017, 8point3 Energy Partners LP owned a controlling non-economic managing member interest in 8point3 Operating Company, LLC (“OpCo”) and a 35.5% limited liability company interest in OpCo, and the Sponsors collectively owned a noncontrolling 64.5% limited liability company interest in OpCo.

The following table provides an overview of the assets that comprise the Portfolio as of August 31, 2017:
Project
 
Location
 
Commercial
Operation Date(1)
 
MW(ac)
(2)
 
Counterparty
 
Remaining
Term of
Offtake Agreement
(in years)(3)
Utility
 
 
 
 
 
 
 
 
 
 
 
Maryland Solar
 
Maryland
 
February 2014
 
20

 
FirstEnergy
Solutions
 
15.6
 
Solar Gen 2
 
California
 
November 2014
 
150

 
San Diego Gas &
Electric
 
22.2
 
Lost Hills Blackwell
 
California
 
April 2015
 
32

 
City of
Roseville/Pacific
Gas and Electric
 
26.3
(4)
North Star
 
California
 
June 2015
 
60

 
Pacific Gas and
Electric
 
17.8
 
RPU
 
California
 
September 2015
 
7

 
City of Riverside
 
23.1
 
Quinto
 
California
 
November 2015
 
108

 
Southern California
Edison
 
18.3
 
Hooper
 
Colorado
 
December 2015
 
50

 
Public Service
Company of Colorado
 
18.3
 
Kingbird
 
California
 
April 2016
 
40

 
Southern California
Public Power Authority(5)
 
18.7
 
Henrietta
 
California
 
October 2016
 
102

 
Pacific Gas and
Electric
 
19.1
 
Stateline
 
California
 
August 2016
 
300

 
Southern California
Edison
 
19.0
 
Commercial & Industrial
 
 
 
 
 
 
 
 
 
 
 
UC Davis
 
California
 
September 2015
 
13

 
University of
California
 
18.0
 
Macy's California
 
California
 
October 2015
 
3

 
Macy's Corporate
Services
 
18.2
 
Macy’s Maryland
 
Maryland
 
December 2016
 
5

 
Macy's Corporate
Services
 
19.3
 
Kern(6)
 
California
 
September 2017
 
18

 
Kern High School District
 
19.5
(7)
Residential Portfolio
 
U.S. – Various
 
June 2014
 
38

 
Approx. 5,800
homeowners(8)
 
15.0
(9)
Total
 
 
 
 
 
946

 
 
 
 
 
 

12

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

(1)
For the Macy’s California Project, the Macy’s Maryland Project, and the Kern Project, COD represents the first date on which all of the solar generation systems within each of the Macy’s California Project, the Macy’s Maryland Project and the Kern Project, respectively, have achieved or are expected to achieve COD. For the Residential Portfolio, COD represents the first date on which all of the residential systems within the Residential Portfolio have achieved COD.
(2)
The MW for the projects in which the Partnership owns less than a 100% interest or in which the Partnership is the lessor under any sale-leaseback financing are shown on a gross basis.
(3)
Remaining term of offtake agreement is measured from the later of August 31, 2017 or the expected COD of the applicable project.
(4)
Remaining term comprised of 1.3 years on a PPA with the City of Roseville, California, followed by a 25-year PPA with PG&E starting in 2019.
(5)
The Kingbird Project is subject to two separate PPAs with member cities of the Southern California Public Power Authority.
(6)
OpCo’s acquisition of the Kern Project is being effectuated in phases, with the closing of the first phase, reflecting a nameplate capacity of approximately 3 MW, having occurred on January 26, 2016, the closing of the second phase, reflecting a nameplate capacity of approximately 5 MW, having occurred on September 9, 2016, the closing of the third phase, reflecting a nameplate capacity of approximately 5 MW, having occurred on November 30, 2016, the closing of the fourth phase, reflecting a nameplate capacity of approximately 3 MW, having closed on February 24, 2017, and the closing of the fifth phase, reflecting a nameplate capacity of approximately 2 MW, having closed on June 9, 2017.
(7)
Remaining term is the weighted average duration of the five phases of the Kern Project.
(8)
Comprised of the approximately 5,800 solar installations located at homes in Arizona, California, Colorado, Hawaii, Massachusetts, New Jersey, New York, Pennsylvania and Vermont, that are held by the Residential Portfolio Project Entity and have an aggregate nameplate capacity of 38 MW.
(9)
Remaining term is the weighted average duration of all of the residential leases, in each case measured from August 31, 2017.

Basis of Presentation and Preparation

The direct and indirect contributions of the IPO Project Entities by the Sponsors to OpCo in connection with the IPO resulted in a business combination for accounting purposes with the IPO SunPower Project Entities being considered the acquirer of the interests contributed by First Solar in the IPO First Solar Project Entities. Therefore, the IPO SunPower Project Entities constitute the “Predecessor.” As used herein, the term “IPO Project Entities” refers to:

the IPO SunPower Project Entities, including:
the Macy’s California Project Entities, which hold the Macy’s California Project;
the Quinto Project Entity, which holds the Quinto Project;
the RPU Project Entity, which holds the RPU Project;
the UC Davis Project Entity, which holds the UC Davis Project; and
the Residential Portfolio Project Entity, which holds the Residential Portfolio Project; and

the IPO First Solar Project Entities, including:
the Lost Hills Blackwell Project, which holds the Lost Hills Project and the Blackwell Project;
the Maryland Solar Project Entity, which holds the Maryland Solar Project;
the North Star Project Entity, which holds the North Star Project; and
the Solar Gen 2 Project Entity, which holds the Solar Gen 2 Project.

In connection with the IPO, SunPower contributed a nearly 100% interest in each of the IPO SunPower Project Entities to OpCo, subject, in the case of the Quinto Project, the RPU Project, the UC Davis Project and the Macy’s California Project, to the tax equity investor’s right to a varying portion of the cash flows from the projects. In connection with the IPO, First Solar directly contributed to OpCo a 100% interest in the Maryland Solar Project Entity and indirectly contributed to OpCo a 49% economic interest in each of the Lost Hills Blackwell Project, the North Star Project and the Solar Gen 2 Project.

Since November 30, 2015, the partnership completed six acquisitions from its Sponsors, four from SunPower and two from First Solar.


13

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

Four of the acquisitions are treated as business combinations:
the Kern Project Entity, which holds the Kern Project;
the Kingbird Project Entities, which holds the Kingbird Project;
the Hooper Project Entity, which holds the Hooper Project; and
the Macy’s Maryland Project Entity, which holds the Macy’s Maryland Project.

Two of the acquisitions are accounted for as equity method investments:
the Henrietta Project Entity, which holds the Henrietta Project. OpCo owns a 49% economic interest in the Henrietta Project Entity; and
the Stateline Project Entity, which holds the Stateline Project. OpCo owns a 34% economic interest in the Stateline Project Entity.

Principles of Consolidation

The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP, and include the accounts of the Partnership, and all of its subsidiaries, as appropriate under consolidation accounting guidelines. The year-end condensed consolidated balance sheet data was derived from the audited financial statements, but does not include all disclosures required by U.S. GAAP. Investments in unconsolidated affiliates in which the Partnership has less than a controlling interest are accounted for using the equity method of accounting. Inter-entity accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal, recurring items) necessary to state fairly its financial position, results of operations and cash flows for the periods presented. The unaudited condensed consolidated financial statements should be read in conjunction with the accounting policies previously disclosed in Part II, Item 8. “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 1—Description of Business” and “—Note 2—Summary of Significant Accounting Policies” of the 2016 10-K. Interim results are not necessarily indicative of results for a full year.

Management Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Significant estimates in these unaudited condensed consolidated financial statements include the assumptions and methodology underlying allowances for doubtful accounts related to accounts receivable and financing receivables; estimates of future cash flows and economic useful lives of property and equipment; the fair value and residual value of leased solar power systems; fair value of financial instruments; fair value of acquired assets and liabilities; valuation of certain accrued liabilities such as accrued system output performance warranty and AROs; and income taxes including the related valuation allowance. Actual results could materially differ from those estimates.

Recently Adopted Accounting Pronouncements

In August 2014, the FASB issued an update to the standards to require management to evaluate whether there are conditions and events that raise substantial doubt about the Partnership’s ability to continue as a going concern within one year after the date the financial statements are issued, and to provide related disclosures. The Partnership adopted the new guidance beginning on December 1, 2016 and the impact of this standard on its consolidated financial statements and disclosures is not material.

Recent Accounting Pronouncements Not Yet Adopted

In January 2017, the FASB issued an update to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. This new guidance becomes effective for the Partnership in the first quarter of fiscal 2019 and is applied prospectively. The Partnership is evaluating the impact of this standard on its consolidated financial statements and disclosures.

In October 2016, the FASB issued an update which amends the guidance on related parties that are under common control. Specifically, this update requires that a single decision maker consider indirect interests held by related parties under common control on a proportionate basis in a manner consistent with its evaluation of indirect interests held through other related parties. That is, the single decision maker does not consider indirect interests held through related parties as equivalent to direct interests in determining whether it meets the economics criterion to be a primary beneficiary. This new guidance

14

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

becomes effective for the Partnership in the first quarter of fiscal 2018. Early adoption is permitted, including adoption in an interim period. The Partnership is evaluating the impact of this standard on its consolidated financial statements and disclosures.

In October 2016, the FASB issued an update which eliminates a prior exception and now requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory, such as property and equipment, when such transfer occurs. This new guidance becomes effective for the Partnership in the first quarter of fiscal 2020 and shall be applied on a modified retrospective basis through a cumulative–effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted. The Partnership is evaluating the impact of this standard on its consolidated financial statements and disclosures.

In August 2016, the FASB issued an update to the statement of cash flows guidance, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. One identified cash flow issue relates to distributions received from equity method investees whereby the reporting entity should make an accounting policy election to classify distributions received from equity method investees using either the cumulative earnings approach or the nature of the distribution approach. This new guidance becomes effective for the Partnership in the first quarter of fiscal 2018 and is applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Partnership is evaluating the change in accounting policy from the cumulative earnings approach to the nature of the distribution approach and the impact on its consolidated statements of cash flows and disclosures.

In March 2016, the FASB issued an update to the equity method investments guidance, which eliminates the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The update requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. This new guidance will be effective for the Partnership beginning on December 1, 2017 on a prospective basis. Early adoption is permitted. The Partnership is evaluating the impact of this standard on its consolidated financial statements and disclosures.

In February 2016, the FASB issued an update to the lease accounting guidance, which requires entities to begin recording assets and liabilities arising from substantially all leases on the balance sheet. The new guidance will also require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. This new guidance will be effective for the Partnership in the first quarter of fiscal 2020 using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. The Partnership is evaluating the impact of this standard on its consolidated financial statements and disclosures.

In May 2014, the FASB issued a new revenue recognition standard based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The FASB has issued several updates to the standard which (i) clarify the application of the principal versus agent guidance; (ii) clarify the guidance relating to performance obligations and licensing; and (iii) clarify assessment of the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transaction. The new revenue recognition standard, amended by the updates, becomes effective for the Partnership in the first quarter of fiscal 2019 and is to be applied retrospectively using one of two prescribed methods. Early adoption is permitted. While the Partnership is continuing to assess all potential impacts of the standard, it currently believes the impact on its consolidated financial statements is not material because over 90% of the Partnership’s total revenue for all periods is comprised of lease revenue, which is substantially unchanged under the new standard.

Other than as described above, there has been no issued accounting guidance not yet adopted by the Partnership that it believes is material or potentially material to its consolidated financial statements. 

15

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

Note 2. Business Combinations

Acquisition accounting is dependent upon certain valuations and other studies that must be completed as of the acquisition date. The judgments made in the context of the purchase price allocation can materially impact the Partnership’s future results of operations. The Partnership’s purchase price allocations for acquisitions completed through November 30, 2016 are final and not subject to revision. For the acquisition completed during the nine months ended August 31, 2017, the valuation is based on the preliminary assessment of the fair values of the assets acquired, liabilities assumed and noncontrolling interests as of the acquisition date, and is subject to change as the Partnership obtains additional information for its estimates during the respective measurement period.

Kern Acquisition:

On January 26, 2016, OpCo and SunPower entered into the Kern Purchase Agreement, which was amended on September 28, 2016, November 30, 2016, February 24, 2017, and June 9, 2017, pursuant to which OpCo agreed to purchase an interest in the Kern Project. OpCo’s acquisition of the Kern Project is being effectuated in phases summarized below:

(i)
Phase 1(a): On January 26, 2016, 8point3 OpCo Holdings, LLC, a wholly owned subsidiary of OpCo (“OpCo Holdings”), acquired from SunPower all of the class B limited liability company interests of the Kern Class B Partnership.  Prior to the date of the execution of the Kern Purchase Agreement and in connection with the closing of the tax equity financing for the Kern Project, described below, the Kern Project Entity, an indirect subsidiary of the Kern Class B Partnership, acquired the Kern Phase 1(a) Assets. The initial phase of the acquisition of the Kern Project is referred to herein as the “Kern Phase 1(a) Acquisition.”

(ii)
Phase 1(b): On September 9, 2016, the Kern Project Entity acquired the assets included in the Kern Phase 1(b) Assets from SunPower. The second phase of the acquisition of the Kern Project is referred to herein as the “Kern Phase 1(b) Acquisition.”

(iii)
Phase 2(a): On November 30, 2016, the Kern Project Entity acquired the Kern Phase 2(a) Assets from SunPower. The third phase of the acquisition of the Kern Project is referred to herein as the “Kern Phase 2(a) Acquisition.”

(iv)
Phase 2(b): On February 24, 2017, the Kern Project Entity acquired the Kern Phase 2(b) Assets from SunPower. The fourth phase of the acquisition of the Kern Project is referred to herein as the “Kern Phase 2(b) Acquisition.”

(v)
Phase 2(c): On June 9, 2017, the Kern Project Entity acquired the Kern Phase 2(c) Assets from SunPower. The fifth phase of the acquisition of the Kern Project is referred to herein as the “Kern Phase 2(c) Acquisition.”

The aggregate purchase price for the acquisition is up to $36.7 million in cash, of which OpCo paid approximately $4.9 million on January 27, 2016 in connection with the closing of the first phase, approximately $9.2 million on September 9, 2016 in connection with the closing of the second phase, approximately $8.4 million on November 30, 2016 in connection with the closing of the third phase, approximately $6.0 million on February 24, 2017 in connection with the closing of the fourth phase, and approximately $3.2 million on June 9, 2017 in connection with the closing of the fifth phase. Please read "—Note 15—Subsequent Events” for further details.

In addition, on January 22, 2016, a subsidiary of the Kern Class B Partnership entered into a tax equity financing facility with a third-party investor, which allocates to OpCo a certain share of cash flows from the Kern Project pursuant to a distribution waterfall. Pursuant to this distribution waterfall, the tax equity investor is entitled to a monthly amount of project cash flow until a specified “flip” point is achieved. After the “flip” point, the cash allocations to OpCo increase. In addition, upon reaching the flip point, OpCo has a right to purchase the tax equity investor’s interests in the project for an amount that is not less than its fair market value. The tax equity investor made capital contributions to fund purchase price payments of approximately $29.2 million, of which $0.9 million, $1.8 million, $1.3 million, $6.7 million, $8.2 million, $6.3 million, and $4.0 million was paid on January 22, 2016, September 9, 2016, November 30, 2016, December 14, 2016, February 24, 2017, June 9, 2017, and September 28, 2017, respectively. For more information about the Partnership's tax equity structures in general, please read Part I, Item 1. “Business—Tax Equity Financing” of its 2016 10-K. 

The Kern Phase 1(a) Acquisition, the Kern Phase 1(b) Acquisition, the Kern Phase 2(a) Acquisition, the Kern Phase 2(b) Acquisition, and the Kern Phase 2(c) Acquisition qualify as business combinations and the Partnership accounts for the transactions under the acquisition method. The purchase allocation of the identifiable assets acquired, liabilities assumed and noncontrolling interests of the Kern Phase 1(a) Assets, the Kern Phase 1(b) Assets, the Kern Phase 2(a) Assets, the Kern Phase 2(b) Assets, and the Kern Phase 2(c) Assets are disclosed in the following table.

16

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

 
Fair Value
 
Kern Phase 1(a)
 
Kern Phase 1(b)
 
Kern Phase 2(a)
 
Kern Phase 2(b)
 
Kern Phase 2(c)
(in thousands)
Assets
 
Assets
 
Assets
 
Assets
 
Assets
Property and equipment
$
9,510

 
$
18,856

 
$
14,873

 
$
11,872

 
$
6,710

Related party payable
(3,435
)
 
(7,123
)
 
(4,504
)
 
(4,287
)
 
(2,618
)
Asset retirement obligation
(322
)
 
(785
)
 
(623
)
 
(493
)
 
(279
)
Noncontrolling interest
(866
)
 
(1,794
)
 
(1,332
)
 
(1,078
)
 
(658
)
Net assets acquired
$
4,887

 
$
9,154

 
$
8,414

 
$
6,014

 
$
3,155


Valuation methodology:

The Partnership utilized the discounted cash flow method under the income approach to value property and equipment for the Kern Phase 1(a) Assets, the Kern Phase 1(b) Assets, the Kern Phase 2(a) Assets, the Kern Phase 2(b) Assets, and the Kern Phase 2(c) Assets. Key assumptions used in the discounted cash flow method included forecasted pre-tax cash flows, forecasted taxable income and discount rates. All estimates, key assumptions and forecasts were reviewed by the Partnership and the fair value analyses and related valuations represent the conclusions of management.

Supplementary Data:

The results of operations for each phase of the Kern Project acquisition have been included in the Partnership’s consolidated statements of operations since their respective dates of acquisition. The Kern Phase 2(b) Assets and the Kern Phase 2(c) Assets contributed approximately $0.3 million and $0.5 million to the Partnership’s operating revenue in the three and nine months ended August 31, 2017, respectively, and increased operating income by $0.1 million and $0.2 million in the three and nine months ended August 31, 2017, respectively. Pro forma results of operations have not been presented as the impact of the acquisitions on February 24, 2017 and June 9, 2017 are not material to the Partnership’s results of operations for the current or prior periods. Additionally, the Kern Phase 2(b) Assets and the Kern Phase 2(c) Assets became operational after the acquisition date and therefore, would not have had any pro forma results in the prior period.

Note 3. Investment in Unconsolidated Affiliates

On November 11, 2016, OpCo entered into the Stateline Purchase Agreement with First Solar to acquire a 34% interest in the Stateline Project for $329.5 million (the “Stateline Acquisition”). The Stateline Acquisition closed on December 1, 2016 and the Partnership recorded an investment of $329.9 million after consideration of acquisition-related costs.

As of August 31, 2017, the Partnership owns a 49% ownership interest in each of SG2 Holdings, North Star Holdings, Lost Hills Blackwell Holdings and Henrietta Holdings, and a 34% ownership interest in Stateline Holdings. The minority membership interests are accounted for as equity method investments, as the Partnership is able to exercise significant influence through its governing board, while the non-affiliated majority owner otherwise controls. The following table summarizes the activity of the Partnership’s investments in its unconsolidated affiliates during each of the three and nine months ended August 31, 2017 and August 31, 2016, respectively:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
August 31, 2017
 
August 31, 2016
 
August 31, 2017
 
August 31, 2016
Balance at the beginning of the period
$
785,832

 
$
348,588

 
$
475,078

 
$
352,070

Investments in its unconsolidated affiliates during the period

 

 
330,087

 

Equity in earnings in unconsolidated affiliates (1)
23,322

 
8,075

 
33,287

 
13,504

Distributions from unconsolidated affiliates
(17,169
)
 
(6,872
)
 
(46,467
)
 
(15,783
)
Balance at the end of the period
$
791,985

 
$
349,791

 
$
791,985

 
$
349,791

 
(1)
The net income (loss) used to determine the Partnership’s equity in earnings of unconsolidated affiliates reflects adjustments pursuant to the equity method of accounting, including the amortization of basis differences resulting from the Partnership’s proportionate share of certain equity method investees’ net assets exceeding their carrying values.

The difference between the amounts at which the Partnership’s investments in unconsolidated affiliates are carried and the Partnership’s proportionate share of the equity method investee’s net assets for equity method investments was $137.4

17

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

million and $83.2 million as of August 31, 2017 and November 30, 2016, respectively. The Partnership accretes the basis difference over the life of the underlying assets and the accretion expense was $1.0 million and $0.4 million for the three months ended August 31, 2017 and August 31, 2016, respectively, and $3.1 million and $1.2 million for the nine months ended August 31, 2017 and August 31, 2016, respectively.
 
The following table presents summarized financial information of SG2 Holdings, North Star Holdings, Lost Hills Blackwell Holdings, Henrietta Holdings and Stateline Holdings as derived from the unaudited condensed consolidated financial statements of such entities for the each of the three and nine months ended August 31, 2017 and August 31, 2016, respectively:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
August 31, 2017
 
August 31, 2016
 
August 31, 2017
 
August 31, 2016
Summary statements of operations information:
 
 
 
 
 
 
 
Revenue
$
74,549

 
$
24,433

 
$
136,442

 
$
52,140

Operating expenses
26,939

 
11,201

 
78,851

 
34,483

Net income
47,627

 
13,346

 
53,298

 
17,964


 
Note 4. Balance Sheet Components

Financing Receivables

The Partnership’s net investment in sales-type leases presented in “Accounts receivable and short-term financing receivables, net” and “Long-term financing receivables, net” on the unaudited condensed consolidated balance sheets is as follows:
 
As of
(in thousands)
August 31, 2017
 
November 30, 2016
Minimum lease payment receivable, net (1)
$
95,373

 
$
100,161

Unguaranteed residual value
12,848

 
12,926

Less: unearned income
(28,186
)
 
(30,557
)
Net financing receivables
$
80,035

 
$
82,530

Short-term financing receivables, net (2)
$
2,551

 
$
2,516

Long-term financing receivables, net
$
77,484

 
$
80,014

 
(1)
Allowance for losses on financing receivables was $0.6 million and $0.7 million as of August 31, 2017 and November 30, 2016, respectively.
(2)
Accounts receivable and short-term financing receivables, net on the unaudited condensed consolidated balance sheets includes other trade accounts receivable of $8.3 million and $2.9 million as of August 31, 2017 and November 30, 2016, respectively.


18

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

Current and Non-current Assets
 
As of
(in thousands)
August 31, 2017
 
November 30, 2016
Prepaid expense and other current assets
 
 
 
Reimbursable network upgrade costs (1)
$
8,615

 
$
13,870

Derivative financial instruments
1,246

 

Other current assets (2)
2,451

 
1,875

Total
$
12,312

 
$
15,745

Property and equipment, net
 
 
 
Utility solar power systems
632,478

 
578,817

Leased solar power systems
137,258

 
137,475

Land
1,020

 
1,020

Construction-in-progress (3)
3,496

 
36,981

 
$
774,252

 
$
754,293

Less: accumulated depreciation
(54,384
)
 
(34,161
)
Total
$
719,868

 
$
720,132

Other long-term assets
 
 
 
Reimbursable network upgrade costs (1)
$
20,026

 
$
21,781

Intangible assets (4)
1,433

 
1,754

Derivative financial instruments

 
897

Total
$
21,459

 
$
24,432

 
(1)
For the Kingbird Project and the Quinto Project, the construction costs related to the network upgrade of a transmission grid belonging to a utility company are reimbursable by that utility company over five years from the date the project reached commercial operation.
(2)
Other current assets included $0.3 million due from SunPower related to system output performance warranties and system repairs in connection with $0.1 million of system output performance warranty accrual and $0.2 million of system repairs accrual recorded in the “Accounts payable and other current liabilities” line item on the unaudited condensed consolidated balance sheets as of August 31, 2017. Similarly, other current assets included $0.5 million due from SunPower related to system output performance warranties and system repairs in connection with $0.2 million of system output performance warranty accrual and $0.3 million of system repairs accrual recorded in the “Accounts payable and other current liabilities” line item on the consolidated balance sheet as of November 30, 2016.
(3)
Construction-in-progress as of August 31, 2017 and November 30, 2016 is the project assets related to the Kern Phase 1(a) Assets.
(4)
Intangible assets represent a customer contract intangible that is amortized on a straight-line basis beginning on COD through the contract term end date of December 31, 2020. Operating revenues were reduced by $0.1 million and $0.3 million in the three and nine months ended August 31, 2017, respectively. Operating revenues were not affected by intangible assets in the three and nine months ended August 31, 2016.


19

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

Current Liabilities
 
As of
(in thousands)
August 31, 2017
 
November 30, 2016
Accounts payable and other current liabilities
 
 
 
Trade and accrued accounts payable
$
885

 
$
1,089

Related party payable (1)
4,417

 
20,653

System output performance warranty
52

 
196

Residential lease system repairs accrual
253

 
331

Other short-term liabilities
958

 
1,502

Total
$
6,565

 
$
23,771

 
(1)
Related party payable on the unaudited condensed consolidated balance sheets as of August 31, 2017 consists of (i) $3.5 million related to the purchase price payable to SunPower, which will be funded by the tax equity investor for the Kern Phase 1(a) Acquisition and the Kern Phase 2(c) Acquisition; (ii) $0.9 million related to accrued distribution to tax equity investors; and (iii) less than $0.1 million for accounts payable to related parties associated with O&M, AMA and MSA fees owed to the Sponsors. Related party payable on the consolidated balance sheets as of November 30, 2016 consists of (i) $19.5 million related to the purchase price payable to SunPower for the Kern Phase 1(a) Acquisition, the Kern Phase 1(b) Acquisition, the Kern Phase 2(a) Acquisition and the Macy’s Maryland Acquisition; (ii) $1.0 million related to accrued distribution to tax equity investors; and (iii) $0.1 million for accounts payable to related parties associated with O&M, AMA and MSA fees owed to the Sponsors.


Note 5. Commitments and Contingencies

Land Use Commitments

The Partnership is a party to various agreements that provide for payments to landowners for the right to use the land upon which projects under PPAs are located.

The total minimum lease and easement commitments at August 31, 2017 under these land use agreements are as follows:
(in thousands)
2017 (remaining
three months)
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Land use payments
$
406

 
$
1,329

 
$
1,686

 
$
1,742

 
$
1,782

 
$
56,411

 
$
63,356

 
Solar Power System Performance Warranty

Lease agreements require the Partnership to undertake a system output performance warranty. The Partnership has recorded in “Accounts payable and other current liabilities” amounts related to these system output performance warranties totaling $0.1 million and $0.2 million as of August 31, 2017 and November 30, 2016, respectively. The Partnership has also recorded in “Other current assets” amounts of $0.1 million and $0.2 million as of August 31, 2017 and November 30, 2016, relating to anticipated performance warranty reimbursements from the O&M provider.


20

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

The following table summarizes accrued system output performance warranty activity for the each of three and nine months ended August 31, 2017 and August 31, 2016, respectively:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
August 31, 2017
 
August 31, 2016
 
August 31, 2017
 
August 31, 2016
Balance at the beginning of the period
$
64

 
$
140

 
$
196

 
$
237

Settlements during the period
(16
)
 
(51
)
 
(67
)
 
(207
)
Adjustments during the period
4

 
110

 
(77
)
 
169

Balance at the end of the period
$
52

 
$
199

 
$
52

 
$
199


Asset Retirement Obligations

The Partnership’s AROs are based on estimated third-party costs associated with the decommissioning of the applicable project assets. Revisions to these costs may increase or decrease in the future as a result of changes in regulations, engineering designs and technology, permit modifications, inflation or other factors. Decommissioning activities generally occur over a period of time commencing at the end of the system’s life.

The following table summarizes ARO activity for each of the three and nine months ended August 31, 2017 and August 31, 2016, respectively:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
August 31, 2017
 
August 31, 2016
 
August 31, 2017
 
August 31, 2016
Balance at the beginning of the period
$
14,319

 
$
11,542

 
$
13,448

 
$
9,992

ARO assumed in acquisition
279

 
278

 
772

 
1,806

Accretion expense
201

 
141

 
558

 
387

Revisions to ARO during the period
(3
)
 
(78
)
 
18

 
(302
)
Balance at the end of the period
$
14,796

 
$
11,883

 
$
14,796

 
$
11,883

 
Legal Proceedings

In the normal course of business, the Partnership may be notified of possible claims or assessments. The Partnership will record a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case.

Although the Partnership may, from time to time, be involved in litigation and claims arising out of its operations in the ordinary course of business, the Partnership is not a party to any litigation or governmental or other proceeding that the Partnership believes will have a material adverse impact on its financial position, results of operations, or liquidity.

Environmental Contingencies

The Partnership reviews its obligations as they relate to compliance with environmental laws, including site restoration and remediation. During each of the three and nine months ended August 31, 2017 and August 31, 2016, there were no known environmental contingencies that required the Partnership to recognize a liability.
 

21

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

Note 6. Lease Agreements and Power Purchase Agreements

Lease Agreements

As of August 31, 2017, the Partnership’s unaudited condensed consolidated financial statements include approximately 5,800 residential lease agreements which have original terms of 20 years and are classified as either operating or sales-type leases. In addition, the lease agreement for the Maryland Solar Project has a lease term that will expire on December 31, 2019, and the lessee, who is an affiliate of First Solar, is obligated to pay a fixed amount of rent that is set based on the expected operations of the plant.

The following table presents the Partnership’s minimum future rental receipts on operating leases (including the lease agreement for the Maryland Solar Project and the residential lease portfolio) placed in service as of August 31, 2017:
 
(in thousands)
2017 (remaining
three months)
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Minimum future rentals on residential
   operating leases placed in service (1)
$
907

 
$
3,707

 
$
3,727

 
$
3,748

 
$
3,770

 
$
42,399

 
$
58,258

Maryland Solar lease
781

 
5,173

 
4,912

 

 

 

 
10,866

Total operating leases
$
1,688

 
$
8,880

 
$
8,639

 
$
3,748

 
$
3,770

 
$
42,399

 
$
69,124

 
(1)
Minimum future rentals on operating leases placed in service do not include contingent rentals that may be received from customers under agreements that include performance-based incentives and executory costs.

As of August 31, 2017, future maturities of net financing receivables for sales-type leases are as follows:
(in thousands)
2017 (remaining
three months)
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Scheduled maturities of minimum lease
   payments receivable (1)
$
1,558

 
$
5,635

 
$
5,721

 
$
5,811

 
$
5,905

 
$
70,743

 
$
95,373

 
(1)
Minimum future rentals on sales-type leases placed in service do not include contingent rentals that may be received from customers under agreements that include performance-based incentives and executory costs.

Power Purchase Agreements

Under the terms of various PPAs, the Partnership’s contracted counterparties may be obligated to take all or part of the output from the system at stipulated prices over defined periods. All PPAs associated with solar generation systems operating as of August 31, 2017 have no minimum lease payments and all of the rental income under these leases is recorded as revenue when the electricity is delivered.

SREC Sales Agreement

The Partnership applies for and receives SRECs for power generated by certain of its solar power systems. The Partnership has entered into a sales agreement with a non-affiliated party (the “SREC Sales Agreement”) to assist it in meeting its own emissions reduction or conservation requirements. Under the terms of the SREC Sales Agreement, the contracted counterparty is obligated to purchase an annual number of SRECs from the Partnership at stipulated prices over a defined period of time. The Partnership recognizes revenue and associated costs upon delivery of the SRECs to the counterparty. As of August 31, 2017, firm sales under the SREC Sales Agreement are as follows:
(in thousands)
2017 (remaining
three months)
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
SREC sales
$
82

 
$
781

 
$
781

 
$
781

 
$
195

 
$

 
$
2,620

 
 

22

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

Note 7. Debt and Financing Obligations
 
The following table summarizes the Partnership’s debt obligations on its unaudited condensed consolidated balance sheets:
 
August 31, 2017
 
November 30, 2016
(in thousands)
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Term loan due June 2020
$
300,000

 
3.24
%
 
$
300,000

 
2.61
%
Incremental term loan due June 2020
250,000

 
3.24
%
 

 
N/A

Delayed draw term loan facility due June 2020
25,000

 
3.24
%
 
25,000

 
2.61
%
Revolving credit facility due June 2020
90,000

 
3.24
%
 
63,000

 
2.61
%
Stateline Promissory Note due December 2020
50,004

 
4.00
%
 

 
N/A

Less: debt issuance costs
(2,814
)
 
N/A

 
(3,564
)
 
N/A

Total
$
712,190

 
 
 
$
384,436

 
 

Credit Facility

On June 5, 2015, OpCo entered into a $525.0 million credit facility, consisting of a $300.0 million term loan facility, a $25.0 million delayed draw term loan facility and a $200.0 million revolving credit facility. On April 6, 2016, the parties thereto amended the credit facility (i) to provide for the lenders’ consent to the Omnibus Agreement, (ii) to expand OpCo’s ability to further amend the Omnibus Agreement without lender consent in the future, subject to certain conditions, (iii) to permit certain customary restrictions on transfers of the equity interests of certain Project Entities, which are jointly owned, indirectly, by OpCo and SunPower, (iv) to supplement the Pledge and Security Agreement between the parties in light of the foregoing amendment, and (v) to make certain clarifying modifications to definitions and cross references. On September 30, 2016, OpCo entered into the Joinder Agreement, pursuant to which OpCo obtained a new $250.0 million incremental term loan facility, increasing the maximum borrowing capacity under the credit facility to $775.0 million.

Loans outstanding under the credit facility bear interest at either (i) a base rate, which is the highest of (x) the federal funds rate plus 0.50%, (y) the administrative agent’s prime rate and (z) one-month LIBOR, in each case, plus an applicable margin; or (ii) one-, two-, three- or six-month LIBOR plus an applicable margin. There will be no principal amortization over the term of the credit facility. The unused portion of the revolving credit facility and delayed draw term loan facility is subject to a commitment fee of 0.30% per annum. OpCo may prepay the borrowings under the term loan facility and the delayed draw term loan facility at any time. OpCo has entered into interest rate swap agreements to hedge the interest rate on a portion of the borrowings under the term loan facility. For more details, please read “—Note 8—Fair Value.”

OpCo’s credit facility contains covenants including, among others, requiring the Partnership to maintain the following financial ratios: (i) a debt to cash flow ratio of not more than (a) 6.00 to 1.00 for the fiscal quarters ending November 30, 2016 through November 30, 2017; and (b) 5.50 to 1.00 for each fiscal quarter ending thereafter; and (ii) a debt service coverage ratio of not less than 1.75 to 1.00. In addition, an event of default occurs under the credit facility upon a change of control. The credit facility defines a change of control as occurring when, among other things, (i) the Sponsors (or either of them) cease to direct the management, directly or indirectly, of the Partnership or OpCo, or (ii) the Sponsors collectively cease to own 35% of the economic interest in OpCo. On April 5, 2017, First Solar notified the general partner’s board of directors of its intention to explore alternatives related to its interests in the Partnership. Following such announcement, SunPower also notified the general partner’s board of directors that it is exploring alternatives related to its interests in the Partnership. Although its Sponsors have publicly announced their current intentions, there is no assurance that either or both of its Sponsors will pursue or effect any particular alternative. In addition, the credit facility contains customary non-financial covenants and certain restrictions that will limit the Partnership’s, OpCo’s and certain of the Partnership’s and its domestic subsidiaries’ ability to, among other things, incur or guarantee additional debt and to make distributions on or redeem or repurchase OpCo common units. The Joinder Agreement amended OpCo’s credit facility to permit OpCo to incur up to $50.0 million in subordinated indebtedness from First Solar or its affiliate to pay a portion of the purchase price for the Stateline Project. As of August 31, 2017, the Partnership was in compliance with its debt covenants.

OpCo’s credit facility is collateralized by a pledge of the equity of OpCo and certain of its subsidiaries. The Partnership and each of OpCo’s subsidiaries, other than certain non-guarantor subsidiaries, have guaranteed the obligations of OpCo under the credit facility.


23

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

As of both August 31, 2017 and November 30, 2016, OpCo had approximately $54.9 million of letters of credit outstanding under the revolving credit facility.

Stateline Promissory Note
 
On December 1, 2016, in connection with the Stateline Acquisition, OpCo issued a promissory note to First Solar in the principal amount of $50.0 million. The Stateline Promissory Note is unsecured and matures on the date that is six months after the maturity date under OpCo’s credit facility. Interest will accrue at a rate of 4.00% per annum, except it will accrue at a rate of 6.00% per annum (i) upon the occurrence and during the continuation of a specified event of default and (ii) in respect of amounts accrued as payments-in-kind pursuant to the terms of the note. OpCo is not permitted to prepay the $50.0 million promissory note without the consent of certain lenders under its existing credit agreement (except for certain mandatory prepayments). Until OpCo has paid in full the principal and interest on promissory note, OpCo is restricted in its ability to: (i) acquire interests in additional projects (other than the acquisition of the Kern Phase 2(a) Assets, the Kern Phase 2(b) Assets, the Kern Phase 2(c) Assets, and the Kern Remaining Assets); (ii) use the net proceeds of equity issuances except as prescribed in the promissory note; (iii) incur additional indebtedness to which the promissory note would be subordinate; and (iv) extend the maturity date under OpCo’s existing credit facility.
 
August 2011 Letter of Credit Facility with Deutsche Bank

In August 2011, the Predecessor’s parent, SunPower, entered into a letter of credit facility agreement with Deutsche Bank, as administrative agent, and certain financial institutions. Payment of obligations under the letter of credit facility is guaranteed by the majority shareholder of SunPower, Total S.A. As of August 31, 2017, and November 30, 2016, letters of credit issued and outstanding under the August 2011 letter of credit facility with Deutsche Bank which is available to SunPower for the Quinto Project and the RPU Project totaled $0.2 million and $11.5 million, respectively. Pursuant to the Omnibus Agreement, SunPower, as the Sponsor who contributed the Quinto Project, canceled one of its letter of credit facilities associated with the Quinto Project upon its achieving COD in November 2015. Since the RPU Project achieved COD in September 2015, SunPower, as the Sponsor who contributed the RPU Project, canceled the related letters of credit, and the Partnership has issued the required letters of credit under its revolving credit facility.

Note 8. Fair Value

Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement (observable inputs are the preferred basis of valuation):

Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Measurements are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1.
Level 3—Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable.

The first two levels in the hierarchy are considered observable inputs and the last is considered unobservable.

Assets and Liabilities Measured at Fair Value on a Recurring Basis 

The following table presents the Partnership’s assets and liabilities measured at estimated fair value on a recurring basis, categorized in accordance with the fair value hierarchy:
 
August 31, 2017
 
November 30, 2016
(in thousands)
Level 2
 
Total
 
Level 2
 
Total
Assets
 

 
 

 
 

 
 

Derivative financial instruments
$
1,246

 
$
1,246

 
$
897

 
$
897

Total assets
$
1,246

 
$
1,246

 
$
897

 
$
897


Derivative financial instruments: On July 17, 2015, OpCo entered into interest rate swap agreements intended to hedge the interest rate risk on the outstanding borrowings under the term loan with an aggregate notional value of $240.0 million. Under the interest rate swap agreements, OpCo paid a fixed swap rate of interest of 1.55% and the counterparties to the

24

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

agreements paid a floating interest rate based on three-month LIBOR at quarterly intervals through the maturity date of August 31, 2018. OpCo had the right to cancel the interest rate swap agreements on August 31, 2016 and any quarterly fixed payment date thereafter with a minimum of five business days' notification. OpCo exercised its right to cancel the interest rate swap agreements on August 31, 2016 and entered into new interest rate swap agreements intended to hedge the interest rate risk on the outstanding borrowings under the term loan with an aggregate notional value of $250.0 million. Under the new interest rate swap agreements, OpCo will pay a fixed swap rate of interest of approximately 0.85% and the counterparties to the agreements will pay a floating interest rate based on one-month LIBOR at monthly intervals through the maturity date of August 31, 2018. On January 5, 2017, OpCo entered into another interest rate swap agreement intended to hedge the interest rate risk on the outstanding borrowings under the term loan with an aggregate notional value of $40.0 million. Under this interest rate swap agreement, OpCo will pay a fixed swap rate of interest of approximately 1.16% and the counterparty to the agreement will pay a floating interest rate based on one-month LIBOR at monthly intervals through the maturity date of August 31, 2018.

As of both August 31, 2017 and November 30, 2016, these interest rate swap agreements had not been designated as cash flow hedges and are reflected at fair value on the unaudited condensed consolidated balance sheets. As of August 31, 2017, these interest rate swap agreements have been presented in other current assets on the unaudited condensed consolidated balance sheet since the maturity date is within one year after the balance sheet date. As of November 30, 2016, these interest rate swap agreements have been presented in other long-term assets on the unaudited condensed consolidated balance sheet since the maturity date is over one year after the balance sheet date. During the three and nine months ended August 31, 2017, the Partnership recorded an unrealized loss of $0.3 million and an unrealized gain of $0.3 million, respectively, within other expense (income) in the unaudited condensed consolidated statements of operations related to the change in fair value. During the three and nine months ended August 31, 2016, the Partnership recorded an unrealized gain of $0.3 million and $0.5 million, respectively, within other expense (income) in the unaudited condensed consolidated statements of operations related to the change in fair value. The primary inputs into the valuation of interest rate swaps are interest yield curves, interest rate volatility, and credit spreads. The Partnership's interest rate swaps are classified within Level 2 of the fair value hierarchy, since all significant inputs are corroborated by market observable data. There were no transfers in or out of Level 1, Level 2 and Level 3 during the period.

Liabilities Measured at Fair Value on a Nonrecurring Basis

Long-term debt and financing obligations: The estimated fair value of the Partnership’s long-term debt was classified within Level 2 of the fair value hierarchy as of August 31, 2017 and November 30, 2016, and approximated its carrying value of $712.2 million and $384.4 million, respectively. The term loan facility is a variable rate debt with the interest rate indexed to the market and reset on a frequent and short-term basis. The Stateline Promissory Note is a fixed rate debt and the fair value was estimated using the income approach based on observable market inputs.

Note 9. Noncontrolling Interests

Noncontrolling interests represent the portion of net assets in consolidated subsidiaries that are not attributable, directly or indirectly, to the Partnership. For accounting purposes, the holders of noncontrolling interests of the Partnership include the Sponsors, which are SunPower and First Solar, as described in “—Note 1—Description of Business,” and third-party investors under the tax equity financing facilities. As of August 31, 2017 and November 30, 2016, First Solar and SunPower had noncontrolling interests of 28.0% and 36.5%, respectively, in OpCo.

In addition, certain subsidiaries of OpCo have entered into tax equity financing facilities with third-party investors under which the parties invest in entities that hold the solar power systems. The Partnership, through OpCo, holds controlling interests in these less-than-wholly-owned entities and has therefore fully consolidated these entities. The Partnership accounts for the portion of net assets using the HLBV Method in the consolidated entities attributable to the investors as “Redeemable noncontrolling interests” and “Noncontrolling interests” in its unaudited condensed consolidated financial statements. Noncontrolling interests in subsidiaries that are redeemable at the option of the noncontrolling interest holder are classified as “Redeemable noncontrolling interests in subsidiaries” between liabilities and equity on the unaudited condensed consolidated balance sheets and the balance is the greater of the carrying value calculated under the HLBV Method or the redemption value.

During the three and nine months ended August 31, 2017, OpCo acquired noncontrolling interests totaling $0.7 million and $1.7 million, respectively. Please read “—Note 2—Business Combinations” for further details. During the three and nine months ended August 31, 2016, OpCo acquired noncontrolling interests totaling $0.6 million and $36.8 million, respectively. Please read “—Note 3—Business Combinations” of the 2016 10-K for further details.


25

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

As of August 31, 2017 and November 30, 2016, redeemable noncontrolling interests attributable to tax equity investors after adjusting the carrying amount to the redemption value was $17.3 million and $17.6 million, respectively, and noncontrolling interests attributable to tax equity investors were $43.3 million and $40.8 million, respectively.

During the three months ended August 31, 2017 and August 31, 2016 such indirect subsidiaries of OpCo received $5.6 million and zero, respectively, contributions from third-party investors under the related facilities and attributed $1.6 million and $24.3 million, respectively, in losses to the third-party investors primarily as a result of allocating certain assets, including tax credits, if any, to the investors. During the nine months ended August 31, 2017 and August 31, 2016 such indirect subsidiaries of OpCo received $24.4 million and $47.2 million, respectively, contributions from third-party investors under the related facilities and attributed $17.1 million and $112.1 million, respectively, in losses to the third-party investors primarily as a result of allocating certain assets, including tax credits, if any, to the investors.

During the three months ended August 31, 2017 and August 31, 2016, such indirect subsidiaries of OpCo made distributions to third-party investors under the related facilities of $2.7 million and $2.3 million, respectively. During the nine months ended August 31, 2017 and August 31, 2016, such indirect subsidiaries of OpCo made distributions to third-party investors under the related facilities of $6.7 million and $4.9 million, respectively.

The following table presents the noncontrolling interest balances by entity, reported in shareholders’ equity in the unaudited condensed consolidated balance sheets as of August 31, 2017 and November 30, 2016:
 
As of
(in thousands)
August 31, 2017
 
November 30, 2016
First Solar
$
236,746

 
$
238,210

SunPower
309,440

 
311,327

Tax equity investors
43,313

 
40,794

Total
$
589,499

 
$
590,331


Note 10. Shareholders’ Equity

On June 24, 2015, the Partnership completed its IPO by issuing 20,000,000 of its Class A shares representing limited partner interests in the Partnership to the public. On September 28, 2016 the Partnership sold in an underwritten registered public offering 8,050,000 Class A shares representing limited partner interests in the Partnership.

ATM Program

On January 30, 2017, the Partnership established the ATM Program under which the Partnership may sell Class A shares from time to time through the ATM Agents up to an aggregate sales price of $125.0 million. The Partnership may also sell Class A shares to any ATM Agent, as principal for its own account, at a price agreed upon at the time of the sale. The Partnership will use the net proceeds from sales under the ATM Program to purchase a number of common units in OpCo equal to the number of Class A shares issued under the ATM Program. OpCo may use the proceeds for general corporate purposes, which may include, among other things, repaying borrowings under the Stateline Promissory Note and OpCo’s credit facilities, and funding working capital or acquisitions. No shares were issued under the ATM Program during the quarter ended August 31, 2017.

As of both August 31, 2017 and November 30, 2016, the Partnership owned a 35.5% limited liability company interest in OpCo as well as a controlling noneconomic managing member interest in OpCo, and the Sponsors collectively owned 51,000,000 Class B shares in the Partnership, with SunPower and First Solar having owned 28,883,075 and 22,116,925 Class B shares, respectively, and together, having owned a noncontrolling 64.5% limited liability company interest in OpCo.


26

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

The following shares of the Partnership were outstanding as of August 31, 2017 and November 30, 2016, respectively:
 
As of
 
 
Shares
August 31, 2017
 
November 30, 2016
 
Shareholder
Class A shares
28,084,935

 
28,072,680

 
Public
Class B shares
22,116,925

 
22,116,925

 
First Solar
Class B shares
28,883,075

 
28,883,075

 
SunPower
Total shares outstanding
79,084,935

 
79,072,680

 
 
 
Cash Distribution

On July 14, 2017, the Partnership distributed $7.4 million on its Class A shares and OpCo distributed $13.5 million on its common and subordinated units, or in each case $0.2642 per share or unit, for the period from March 1, 2017 to May 31, 2017.

Note 11. Net Income Per Share

Basic net income per share is computed by dividing net income attributable to Class A shareholders by the weighted average number of Class A shares outstanding for the applicable period. Diluted net income per share is computed using basic weighted average Class A shares outstanding plus, if dilutive, any potentially dilutive securities outstanding during the period using the treasury-stock-type method. Pursuant to the Exchange Agreement entered into among the Partnership, the General Partner, OpCo, a wholly owned subsidiary of SunPower and a wholly owned subsidiary of First Solar, the Sponsors can tender OpCo common units and an equal number of such Sponsor’s Class B shares for redemption, and the Partnership has the right to directly purchase the tendered OpCo common units and Class B shares for, subject to the approval of its conflicts committee, cash or the issuance of Class A shares of the Partnership. If the Partnership elects to issue Class A shares, it would cancel the tendered Class B shares and hold the OpCo common units with the other OpCo common units it previously held, since the number of Class A shares issued must at all times equal the number of OpCo common units held by the Partnership. Since the Partnership would be holding additional OpCo common units, the net income attributable to Class A shares would proportionately increase, resulting in no change to net income per share for the three and nine months ended August 31, 2017 and August 31, 2016, respectively. In addition, there were no potentially dilutive securities (including any stock options, restricted stock and restricted stock units) for the three and nine months ended August 31, 2017 and August 31, 2016, respectively.


27

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

The following table presents the calculation of basic and diluted net income per share:
 
Three Months Ended
 
Nine Months Ended
(in thousands, except per share amounts)
August 31, 2017
 
August 31, 2016
 
August 31, 2017
 
August 31, 2016
Basic net income per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Class A shareholders
$
7,473

 
$
7,593

 
$
11,720

 
$
22,923

Denominator:
 
 
 
 
 
 
 
Basic weighted-average shares
28,081

 
20,015

 
28,077

 
20,011

 
 
 
 
 
 
 
 
Basic net income per share
$
0.27

 
$
0.38

 
$
0.42

 
$
1.15

 
 
 
 
 
 
 
 
Diluted net income per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Class A shareholders
$
7,473

 
$
7,593

 
$
11,720

 
$
22,923

Add: Additional net income attributable to
   Class A shares due to increased percentage
   ownership in OpCo, net of tax, from the
   conversion of Class B shares
4,162

 
5,985

 
6,592

 
17,897

 
$
11,635

 
$
13,578

 
$
18,312

 
$
40,820

Denominator:
 
 
 
 
 
 
 
Basic weighted-average shares
28,081

 
20,015

 
28,077

 
20,011

Effect of dilutive securities:
 
 
 
 
 
 
 
Class B shares (1)
15,500

 
15,500

 
15,500

 
15,500

Diluted weighted-average shares
43,581

 
35,515

 
43,577

 
35,511

 
 
 
 
 
 
 
 
Diluted net income per share
$
0.27

 
$
0.38

 
$
0.42

 
$
1.15


(1)
Up to the amount of OpCo common units held by Sponsors


Note 12. Related Parties

Management Services Agreements

Immediately prior to the completion of the IPO on June 24, 2015, the Partnership, together with the General Partner, OpCo and Holdings, entered into similar but separate MSAs with affiliates of each of the Sponsors (each, a “Service Provider”). Under the MSAs, the Service Providers provide or arrange for the provision of certain administrative and management services for the Partnership and certain of its subsidiaries, including managing the Partnership’s day-to-day affairs, in addition to those services that are provided under existing O&M agreements and AMAs between affiliates of the Sponsors and certain of the subsidiaries of the Partnership. In August 2015, the First Solar MSA and the SunPower MSA were amended to adjust the annual management fee payable to each respective Service Provider. Under the First Solar MSA, OpCo pays an annual management fee of $0.6 million to the First Solar Service Provider. Under the SunPower MSA, OpCo pays an annual management fee of $1.1 million to the SunPower Service Provider. These payments are subject to annual adjustments for inflation. On January 20, 2017, the parties thereto amended the SunPower MSA to include Kingbird Solar, LLC and the Kingbird Project Entities under certain aspects of SunPower’s scope of managerial services effective April 30, 2016 in return for the associated AMA fee payable by First Solar Asset Management, LLC.

Costs incurred for these services were $0.4 million and $1.3 million the three and nine months ended August 31, 2017, respectively, and $0.4 million and $1.2 million for the three and nine months ended August 31, 2016, respectively.


28

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

EPC Agreements

Various projects are designed, engineered, constructed and commissioned pursuant to EPC agreements with affiliates of the Sponsors, which may include a 2- to 10-year system warranty against defects in materials, construction, fabrication and workmanship, and in some cases, may include a 25-year power and product warranty on certain modules.

As of August 31, 2017, all of the projects contributed by the Sponsors on the date of the IPO, along with the Henrietta Project, the Hooper Project, the Kern Phase 1(b) Assets, the Kern Phase 2(a) Assets, the Kern 2(b) Assets, the Kern 2(c) Assets, the Kingbird Project, the Macy’s Maryland Project and the Stateline Project have achieved COD. The Kern Phase 1(a) Assets are construction-in-progress as of August 31, 2017 and achieved COD in September 2017. SunPower as the EPC provider is required to complete the Kern Phase 1(a) Assets and pursuant to the Omnibus Agreement, all the associated costs to complete the Kern Phase 1(a) Assets are obligations of SunPower.

O&M Agreements and Asset Management Agreements

The Project Entities and certain other subsidiaries have entered into O&M agreements and AMAs with affiliates of the Sponsors, as applicable (except where such persons are otherwise subject to O&M agreements or AMAs with unaffiliated third parties). Under the terms of the O&M agreements and the AMAs, such affiliates have agreed to provide a variety of operation, maintenance and asset management services, and certain performance warranties or availability guarantees, to the subsidiaries of the Partnership in exchange for annual fees, which are subject to certain adjustments.

Costs incurred for O&M and AMA services were $1.7 million and $1.5 million for the three months ended August 31, 2017 and August 31, 2016, respectively, and $5.0 million and $3.8 million for the nine months ended August 31, 2017 and August 31, 2016, respectively.

Omnibus Agreement

The Partnership has entered into the Omnibus Agreement with its Sponsors, the General Partner, OpCo and Holdings.

The material provisions of the Omnibus Agreement are as follows: (a) each Sponsor was granted an exclusive right to perform certain services not otherwise covered by an O&M agreement or an AMA on behalf of the Project Entities contributed by such Sponsor; (b) with respect to any project in the Portfolio that had not achieved commercial operation as of the date contributed to the Partnership, the Sponsor who contributed such project agreed to pay to OpCo all costs required to complete such project, as well as certain liquidated damages in the event such project fails to achieve operability pursuant to an agreed schedule (subject to certain adjustments); (c) with respect to the Quinto Project and the North Star Project, the Sponsor who contributed such project agreed to pay to OpCo the difference, if any, between the amount of network upgrade refunds projected to be received in respect of such Sponsor’s contributed project at the time of the IPO and the amount of network upgrade refunds projected to be received given the actual amount of upgrade costs incurred in respect of such project; (d) each Sponsor agreed to certain undertakings on the part of its affiliates who are members of the Project Entities or who provide asset management, construction, operating and maintenance and other services to the Project Entities contributed by such Sponsor; (e) to the extent a Sponsor continues to post credit support on behalf of a Project Entity after it has been contributed to OpCo, OpCo agreed to reimburse such Sponsor upon any demand or draw under such credit support, and the Sponsor agreed to maintain such support pursuant to the applicable underlying contractual or regulatory requirements; (f) each Sponsor agreed to indemnify OpCo for any costs it incurs with respect to certain tax-related events and events in connection with tax equity financing arrangements; and (g) the parties agreed to a mutual undertaking regarding confidentiality and use of names, trademarks, trade names and other insignias. The schedules of the Omnibus Agreement are amended in connection with each project acquisition to include the solar power systems acquired effective the closing date of such acquisition.

During the three and nine months ended August 31, 2017, the Partnership received less than $0.1 million and $0.1 million, respectively, in indemnity payments from Sponsors related to the delay in commercial operations of the Kern Phase 1(a) Assets. During the three and nine months ended August 31, 2016, the Partnership received $0.1 million and $10.0 million, respectively, related to a shortfall associated with the network upgrade refunds projected to be received.

Promissory Notes

On November 25, 2015, OpCo issued a short-term promissory note to First Solar in the principal amount of $2.0 million (the “Short-term Note”), in exchange for First Solar’s loan of such amount to OpCo. Upon the receipt of certain payments by the Solar Gen 2 Project Entity from SDG&E under the power purchase agreement between the Solar Gen 2 Project Entity and SDG&E, which had been previously withheld pending completion of an administrative requirement (each, a “Specified

29

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

Payment”), OpCo was obligated to repay a portion of the principal amount of the Short-term Note equal to such Specified Payment and the unpaid balance of all interest accrued under the Short-term Note to and including the date of such repayment. Interest under the Short-term Note accrued at a rate of 1% on the portion of the principal of the Short-term Note equal to the amount of each Specified Payment from the date SDG&E remitted such payment to the Solar Gen 2 Project Entity through the date that OpCo repaid such amount to First Solar as described above. OpCo is permitted to prepay the Short-term Note at any time without penalty or premium. On December 30, 2016, OpCo repaid the Short-term Note to First Solar.

In connection with the closing of the Stateline Acquisition on December 1, 2016, OpCo issued the Stateline Promissory Note to First Solar in the principal amount of $50.0 million. Please read “—Note 7— Debt and Financing Obligations” for further details.

Purchase and Sale Agreements

On November 11, 2016, OpCo entered into the Stateline Purchase Agreement with First Solar and First Solar Asset Management, LLC pursuant to which OpCo agreed to purchase an interest in the Stateline Project, as further described above in “—Note 3—Investment in Unconsolidated Affiliates.” Effective December 1, 2016, OpCo acquired Stateline Holdings from First Solar for a total purchase price of $329.5 million (before consideration of acquisition-related costs).

On January 26, 2016, OpCo entered into the Kern Purchase Agreement with SunPower pursuant to which OpCo agreed to purchase an interest in the Kern Project, as further described above in “—Note 2—Business Combinations.” Effective January 26, 2016, a subsidiary of OpCo acquired from SunPower all of the class B limited liability company interests of the Kern Class B Partnership. Pursuant to the Kern Purchase Agreement, the purchase price for the Kern Project will be paid by OpCo when each phase of the project reaches “mechanical completion.” In addition, on January 22, 2016, a subsidiary of the Kern Class B Partnership entered into a tax equity financing facility with a third-party investor, which allocates to OpCo a certain share of cash flows from the Kern Project pursuant to a specified distribution waterfall. The tax equity investor made capital contributions to fund purchase price payments of approximately $29.2 million, of which $0.9 million, $1.8 million, $1.3 million, $6.7 million, $8.2 million, $6.3 million, and $4.0 million was paid on January 22, 2016, September 9, 2016, November 30, 2016, December 14, 2016, February 24, 2017, June 9, 2017, and September 28, 2017, respectively.

First Solar ROFO Agreement

Pursuant to the First Solar ROFO Agreement, First Solar previously granted to OpCo a right of first offer to purchase certain solar energy generating facilities for a period of five years. Such solar projects included the 179 MW Switch Station solar generation project in Nevada (“Switch Station”), the 40 MW Cuyama solar generation project in California (“Cuyama”), and the 280 MW California Flats solar generation project in California (“California Flats”). On February 13, 2017, OpCo waived the 45-day negotiation period under the First Solar ROFO Agreement with respect to Switch Station and on May 15, 2017, OpCo waived the 45-day negotiation period under the First Solar ROFO Agreement with respect to Cuyama and California Flats; following such waivers, First Solar had the right to offer and sell Switch Station, Cuyama, and California Flats to a third party, in accordance with the terms of the First Solar ROFO Agreement. On July 13, 2017, August 17, 2017, and August 22, 2017, First Solar sold the interests subject to the First Solar ROFO Agreement in Switch Station, Cuyama, and California Flats, respectively, to third parties, eliminating OpCo's ability to acquire such interests or any related assets. In addition, with First Solar's sale of such interests in Switch Station, Cuyama, and California Flats, no further projects remain subject to the First Solar ROFO Agreement.

SunPower ROFO Agreement

On February 13, 2017, OpCo entered into the Second Amendment and Waiver to Right of First Offer Agreement (the “Waiver”) with SunPower. Pursuant to SunPower ROFO Agreement, SunPower previously granted to OpCo a right of first offer to purchase certain solar energy generating facilities for a period of 5 years. Such solar projects included the 100 MW El Pelicano solar generation project in Chile (“El Pelicano”) and the Boulder Solar 1 solar generation project in Nevada ("Boulder Solar"). Pursuant to the Waiver, OpCo waived its rights under the ROFO Agreement with respect to El Pelicano. The Waiver also contains customary representations, warranties and agreements of OpCo and SunPower. On August 11, 2017, OpCo waived the 45-day negotiation period under the SunPower ROFO Agreement with respect to Boulder Solar; following such waiver, SunPower has the right to offer and sell Boulder Solar to a third party, in accordance with the terms of the SunPower ROFO Agreement.


30

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

Maryland Solar Lease Arrangement

The Maryland Solar Project Entity has leased the Maryland Solar Project to an affiliate of First Solar. Under the arrangement, First Solar’s affiliate is obligated to pay a fixed amount of rent that is set based on the expected operations of the plant. The lease agreement will expire on December 31, 2019 (unless terminated earlier pursuant to its terms).

FirstEnergy Solutions Corp. (“FirstEnergy”), the Partnership’s offtake counterparty with respect to the Maryland Solar Project, had its credit rating downgraded multiple times in 2016 and 2017. As of August 14, 2017, the credit rating of FirstEnergy was Caa1 and CCC- by Moody’s Investors Service and Standard & Poor’s Ratings Services, respectively, both of which are below investment grade. In addition, Standard & Poor’s Ratings Services placed FirstEnergy on CreditWatch with negative implications, based on a $1.51 billion pretax impairment charge that the company’s competitive business will incur from the deactivation of several coal units. In November 2016, FirstEnergy Corp., the parent of FirstEnergy, announced a strategic review of its competitive business, pursuant to which the company would seek to move away from competitive markets. FirstEnergy’s annual report on Form 10-K for the year ended December 31, 2016 reported a substantial uncertainty as to their ability to continue as a going concern.

As further described in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence—Agreements with our Sponsors—Maryland Solar Lease Arrangement” in the 2016 10-K, First Solar’s affiliate is obligated under the Maryland Solar lease arrangement to pay a fixed amount of rent that is set based on the expected operations of the plant. Such lease agreement will terminate upon any termination of the PPA for the Maryland Solar Project or the site ground lease. Pursuant to the PPA for the Maryland Solar Project, a FirstEnergy bankruptcy would be an event of default under the PPA, permitting (subject to applicable law) the termination of the PPA although FirstEnergy may choose to renegotiate or maintain the PPA in its current form. Upon any such early termination of the lease agreement, First Solar’s affiliate is obligated to return the facility in its then-current condition and location to the Partnership, without any warranties, and no rent shall thereafter be payable by such First Solar affiliate. In the event that the PPA was terminated and First Solar were to subsequently terminate the Maryland Solar Lease Agreement, the Maryland Solar Project would have no agreement through which to sell the energy that it produces, which equates to approximately $8.0 million in annual revenue, and the Partnership can enter into a replacement offtake agreement with a different counterparty. As of August 31, 2017, FirstEnergy is current with respect to the payments due under the PPA for the Maryland Solar Project.

The Partnership evaluates its long-lived assets, including property and equipment and projects, for impairment whenever events or changes in circumstances indicate the carrying value of such assets may not be recoverable. In consideration of the above events, the Partnership evaluated whether the carrying value of the project may no longer be recoverable using a probability-weighted assessment of potential outcomes and related undiscounted cash flows. As a result of such evaluation, the Partnership concluded the estimated future undiscounted net cash flows expected to be generated by the project over its estimated useful life exceeded the $52.0 million carrying value of the Maryland Solar Project's property and equipment as of August 31, 2017. Such assessment is subject to significant uncertainty and could change significantly as facts and circumstances change. In the event that the PPA for the Maryland Solar Project was terminated, if the Partnership is unable to enter into a replacement agreement or sell the energy it produces under similar terms, the carrying value of the project may not be recoverable, and the Partnership could record a material impairment loss in the amount by which the carrying value exceeds the fair value.

Note 13. Income Taxes

The provision for income taxes differed from the amount computed by applying the statutory U.S. federal rate of 35% primarily due to the tax impact of equity in earnings, the tax impact of noncontrolling interest, and state tax rates (net of federal benefit) in various jurisdictions, most significantly California.

The Partnership’s financial reporting year-end is November 30 while its tax year-end is December 31. The Partnership has elected to base the tax provision on the financial reporting year; therefore, since the 2017 financial reporting year is December 1, 2016 through November 30, 2017, the taxable income (loss) included in the 2017 tax provision is for the tax year ended December 31, 2016. The provision accrued at the financial reporting year-end will be a discrete period computation, and the tax credits and permanent differences recognized in that accrual will be those generated between the tax year-end date and the financial reporting year-end date. With the exception of minimum state income and franchise tax payments, any amounts recorded for income tax provision (benefit) represent deferred income taxes being provided on the net income before taxes of OpCo, a non-taxable partnership, which is allocated to the Partnership.

Although organized as a limited partnership under state law, the Partnership elected to be treated as a corporation for U.S. federal income tax purposes. Accordingly, the Partnership is subject to U.S. federal income taxes at regular corporate rates

31

8point3 Energy Partners LP
Notes to Unaudited Condensed Consolidated Financial Statements — Continued

on its net taxable income, and distributions it makes to holders of its Class A shares will be taxable as ordinary dividend income to the extent of its current and accumulated earnings and profits as computed for U.S. federal income tax purposes.

The Partnership accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the unaudited condensed consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Valuation allowances are provided against deferred tax assets when management cannot conclude that it is more likely than not that some portion or all deferred tax assets will be realized.

The Partnership recognizes deferred tax assets to the extent that it believes these assets are more likely than not to be realized. In making such a determination, the Partnership considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Partnership determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Partnership records uncertain tax positions on the basis of a two-step process whereby (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Partnership recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

Note 14. Segment Information

The Partnership manages its Portfolio as one segment that operates a portfolio of solar energy generation systems. It operates as a single reportable segment based on the “management” approach.

Long-lived assets consisting of property and equipment, net, were located in the United States. All operating revenues for each of the three and nine months ended August 31, 2017 and August 31, 2016 were from customers located in the United States. The following customers each comprised 10% or more of the its total revenue for each of the three and nine months ended August 31, 2017 and August 31, 2016, respectively:
 
Three Months Ended
 
Nine Months Ended
Customers
August 31, 2017
 
August 31, 2016
 
August 31, 2017
 
August 31, 2016
Southern California Edison
60.2
%
 
63.6
%
 
49.3
%
 
56.6
%
Southern California Public Power Authority
*

 
*

 
10.9
%
 
*

 
*
Total revenue attributable to these customers was less than 10% of the Partnership's total revenue for the period.

Note 15. Subsequent Events
 
Distributions

On September 22, 2017, the general partner’s board of directors declared a cash distribution for our Class A shares of $0.2721 per share for the third quarter of 2017. The general partner’s board of directors declared a corresponding cash distribution for OpCo’s common and subordinated units, which includes all common and subordinated units held by First Solar and SunPower. The third quarter distribution will be paid on October 13, 2017 to shareholders and unitholders of record as of October 3, 2017.

Termination of Kern Purchase Agreement

The conditions precedent to the acquisition of the Kern Remaining Assets set forth in the Kern Letter Agreement were not met on or prior to September 30, 2017. On October 3, 2017, SunPower provided written notice to OpCo terminating the Kern Purchase Agreement, pursuant to Section 9.01(c) of the Kern Purchase Agreement, with respect to OpCo’s obligations to purchase the Kern Remaining Assets pursuant to the Kern Purchase Agreement and the Kern Letter Agreement. Pursuant to the terms of the Kern Letter Agreement, the Kern Remaining Assets are now considered SunPower ROFO Projects.

32



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our 2016 10-K.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations and contain projections of results of operations or of financial condition or forecasts of future events. Words such as “could,” “will,” “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential” or “continue” and similar expressions are used to identify forward-looking statements. Without limiting the generality of the foregoing, forward-looking statements contained in this report include statements concerning our Sponsors’ ownership interest in us, our expectations of plans, strategies, objectives, growth and anticipated financial and operational performance. Forward-looking statements can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. However, when considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report and in the 2016 10-K. Those risk factors and other factors noted throughout this report and in the 2016 10-K could cause our actual results to differ materially from those disclosed in any forward-looking statement. You should also understand that it is not possible to predict or identify all such factors and should not consider the risk factors included in this report and the 2016 10-K to be a complete statement of all potential risks and uncertainties. Please read “Risk Factors” in Part II, Item 1A. of this Quarterly Report on Form 10-Q and in Part I, Item 1A. of the 2016 10-K.
Each forward-looking statement speaks only as of the date of the particular statement and we undertake no obligation to publicly update or revise any forward-looking statements except as required by law.

Overview

Description of Partnership

We are a growth-oriented limited partnership formed by First Solar and SunPower, our Sponsors, to own, operate and acquire solar energy generation projects.

Our Portfolio

As of August 31, 2017, our Portfolio consisted of interests in 946 MW of solar energy projects. As of August 31, 2017, we owned interests in ten utility-scale solar energy projects, all of which are operational. These assets represent 92% of the generating capacity of our Portfolio. As of August 31, 2017, we owned interests in four C&I solar energy projects, three of which were operational and one of which was in late-stage construction, and a portfolio of residential DG Solar assets, which represent 8% of the generating capacity of our Portfolio. Our Portfolio is located entirely in the United States and consists of utility-scale and C&I assets that sell substantially all of their output under long-term, fixed-price offtake agreements primarily with investment grade offtake counterparties and residential DG Solar assets that are leased under long-term fixed-price offtake agreements with high credit quality residential customers with FICO scores averaging 765 at the time of the initial contract. As of August 31, 2017, the weighted average remaining life of offtake agreements across our Portfolio was 19.4 years.

For an overview of the assets that comprise our Portfolio as of August 31, 2017, please read Part I, Item 1. “Financial Information—Notes to Unaudited Condensed Consolidated Financial Statements—Note 1— Description of Business.”