NEP.10Q.2Q.2014

 
 






UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

Commission
File
Number
 
Exact name of registrant as specified in its
charter, address of principal executive office and
registrant's telephone number
 
IRS Employer
Identification
Number
001-36518
 
NEXTERA ENERGY PARTNERS, LP
 
30-0818558

 
 
700 Universe Boulevard
Juno Beach, Florida 33408
(561) 694-4000
 
 

State or other jurisdiction of incorporation or organization:  Delaware

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, and (2) has been subject to such filing requirements for the past 90 days.   Yes o    No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.   Yes þ    No o

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 Securities Exchange Act of 1934.
Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer x
Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).   Yes ¨   No þ

The number of NextEra Energy Partners, LP common units outstanding, as of the latest practicable date:  Common Units outstanding as of July 31, 2014:  18,687,500





TABLE OF CONTENTS


 
 
Page No.
 
 
 
 
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
 
 



2


FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions, strategies, future events or performance (often, but not always, through the use of words or phrases such as result, are expected to, will continue, is anticipated, aim, believe, will, could, should, would, estimated, may, plan, potential, future, projection, goals, target, outlook, predict and intend or words of similar meaning) are not statements of historical facts and may be forward looking.  Forward-looking statements involve estimates, assumptions and uncertainties.  Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the following important factors (in addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements) that could have a significant impact on NextEra Energy Partners, LP's (NEP) operations and financial results, and could cause NEP's actual results to differ materially from those contained or implied in forward-looking statements made by or on behalf of NEP in this Form 10-Q, in presentations, on their respective websites, in response to questions or otherwise.

Operational Risks
NEP has a limited operating history and its projects may not perform as expected.
NEP's ability to make cash distributions to its unitholders will be affected by wind and solar conditions at its projects.
Operation and maintenance of energy projects involve significant risks that could result in unplanned power outages or reduced output.
Some of NEP's projects' and some of NextEra Energy Resources, LLC's (NEER) right of first offer projects' (ROFO Projects) wind turbines are not generating the amount of energy estimated by their manufacturers' original power curves, and the manufacturers may not be able to restore energy capacity at the affected turbines.
Initially, NEP will depend on certain of the projects in its initial portfolio for a substantial portion of its anticipated cash flows.
Terrorist or similar attacks could impact NEP's projects or surrounding areas and adversely affect its business.
NEP's energy production may be substantially below its expectations if a natural disaster or meteorological conditions damage its turbines, solar panels, other equipment or facilities.
NEP is not able to insure against all potential risks and it may become subject to higher insurance premiums.
Warranties provided by the suppliers of equipment for NEP's projects may be limited by the ability of a supplier to satisfy its warranty obligations or by the expiration of applicable time or liability limits, which could reduce or void the warranty protections, or the warranties may be insufficient to compensate NEP's losses.
Supplier concentration at certain of NEP's projects may expose it to significant credit or performance risks.
NEP relies on interconnection and transmission facilities of third parties to deliver energy from its projects, and if these facilities become unavailable, NEP's projects may not be able to operate or deliver energy.
NEP's business is subject to liabilities and operating restrictions arising from environmental, health and safety laws and regulations.
NEP's projects may be adversely affected by legislative changes or a failure to comply with applicable energy regulations.
As a result of the U.S. Federal Power Act (FPA) and the U.S. Federal Energy Regulatory Commission's (FERC) regulations of transfers of control over public utilities, an investor could be required to obtain FERC approval to acquire common units that would give the investor and its affiliates indirect ownership of 10% or more in NEP's U.S. project entities.
NEP does not own all of the land on which the projects in its initial portfolio are located and its use and enjoyment of the property may be adversely affected to the extent that there are any lienholders or leaseholders that have rights that are superior to NEP's rights.
NEP is subject to risks associated with litigation or administrative proceedings that could materially impact its operations, including future proceedings related to projects it subsequently acquires.
The Summerhaven, Conestogo and Bluewater projects are subject to Canadian domestic content requirements under their Feed-in-Tariff (FIT) Contracts.
NEP's cross-border operations require NEP to comply with anti-corruption laws and regulations of the U.S. government and non-U.S. jurisdictions.
NEP is subject to risks associated with its ownership or acquisition of projects that remain under construction, which could result in its inability to complete construction projects on time or at all, and make projects too expensive to complete or cause the return on an investment to be less than expected.

Contract Risks
NEP relies on a limited number of counterparties in its energy sale arrangements and NEP is exposed to the risk that they are unwilling or unable to fulfill their contractual obligations to NEP or that they otherwise terminate their agreements with NEP.
NEP may not be able to extend, renew or replace expiring or terminated agreements, such as its power purchase agreements (PPAs), Renewable Energy Standard Offer Program (RESOP) Contracts and FIT Contracts, at favorable rates or on a long-term basis.
If the energy production by or availability of NEP's U.S. projects is less than expected, they may not be able to satisfy minimum production or availability obligations under NEP's U.S. project entities’ PPAs.

Risks Related to NEP's Acquisition Strategy and Future Growth
NEP's growth strategy depends on locating and acquiring interests in additional projects consistent with its business strategy at favorable prices.

3


NextEra Energy Operating Partners, LP's (NEP OpCo) partnership agreement requires that it distribute its available cash, which could limit its ability to grow and make acquisitions.
Lower prices for other fuel sources reduce the demand for wind and solar energy.
Government regulations providing incentives and subsidies for clean energy could change at any time and such changes may negatively impact NEP's growth strategy.
NEP's growth strategy depends on the acquisition of projects developed by NextEra Energy, Inc. (NEE) and third parties, which face risks related to project siting, financing, construction, permitting, the environment, governmental approvals and the negotiation of project development agreements.
NEP's ability to effectively consummate future acquisitions will also depend on its ability to arrange the required or desired financing for acquisitions.
Acquisitions of existing clean energy projects involve numerous risks.
Renewable energy procurement is subject to U.S. state and Canadian provincial regulations, with relatively irregular, infrequent and often competitive procurement windows.
While NEP currently owns only wind and solar projects, NEP may acquire other sources of clean energy, including natural gas and nuclear projects, and may expand to include other types of assets including transmission projects, and any future acquisition of non-renewable energy projects, including transmission projects, may present unforeseen challenges and result in a competitive disadvantage relative to NEP's more-established competitors.
NEP faces substantial competition primarily from developers, independent power producers (IPPs), pension and private equity funds for opportunities in North America.

Risks Related to NEP's Financial Activities
Restrictions in NEP OpCo's subsidiaries' revolving credit facility could adversely affect NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.
NEP's cash available for distribution to its unitholders may be reduced as a result of restrictions on its subsidiaries’ cash distributions to NEP under the terms of their indebtedness.
NEP's subsidiaries’ substantial amount of indebtedness may adversely affect NEP's ability to operate its business and its failure to comply with the terms of its indebtedness could have a material adverse effect on NEP's financial condition.
Currency exchange rate fluctuations may affect NEP's operations.
NEP is exposed to risks inherent in its use of interest rate swaps.

Risks Related to NEP's Relationship with NEE
NEE will exercise substantial influence over NEP and NEP is highly dependent on NEE and its affiliates.
NEP is highly dependent on credit support from NEE and its affiliates;
NEP's subsidiaries may default under contracts or become subject to cash sweeps if credit support is terminated, if NEE or its affiliates fail to honor their obligations under credit support arrangements, or if NEE or another credit support provider ceases to satisfy creditworthiness requirements, and NEP will be required in certain circumstances to reimburse NEE for draws that are made on credit support.
NEER, an indirect wholly-owned subsidiary of NEE, or one of its affiliates will be permitted to borrow funds received by NEP's subsidiaries, including NEP OpCo, as partial consideration for its obligation to provide credit support to NEP, and NEER will use these funds for its own account without paying additional consideration to NEP and is obligated to return these funds only as needed to cover project costs and distributions or as demanded by NEP OpCo.
NEP's financial condition and ability to make distributions to its unitholders, as well as its ability to grow distributions in the future, is highly dependent on NEER’s performance of its obligations to return a portion of the funds borrowed from NEP's subsidiaries.
NEP may not be able to consummate future acquisitions from NEER.
NextEra Energy Partners GP, Inc. (NEP GP), NEP's general partner, and its affiliates, including NEE, have conflicts of interest with NEP and limited duties to NEP and its unitholders and they may favor their own interests to the detriment of NEP and holders of NEP's common units;
NEE and other affiliates of NEP GP are not restricted in their ability to compete with NEP.
NEP may be unable to terminate the management services agreement among NEP, NextEra Energy Management Partners, LP (NEE Management), NEP OpCo and NEP GP (Management Services Agreement).
If NEE Management terminates the Management Services Agreement, NEER terminates the management services subcontract between NEE Management and NEER (Management Sub-Contract) or either of them defaults in the performance of its obligations thereunder, NEP may be unable to contract with a substitute service provider on similar terms, or at all.
NEP's arrangements with NEE limit its liability, and NEP has agreed to indemnify NEE against claims that it may face in connection with such arrangements, which may lead NEE to assume greater risks when making decisions relating to NEP than it otherwise would if acting solely for its own account.
The credit and risk profile of NEP GP and its owner, NEE, could adversely affect NEP's credit ratings and risk profile, which could increase NEP's borrowing costs or hinder NEP's ability to raise capital.

Risks Related to Ownership of NEP's Common Units
NEP's ability to make distributions to its unitholders depends on the ability of NEP OpCo to make cash distributions to its limited partners.

4


If NEP incurs material tax liabilities, NEP's distributions to its unitholders may be reduced, without any corresponding reduction in the amount of the IDR Fee as defined in the Management Services Agreement payable to NEE Management under the Management Services Agreement.
Holders of NEP's common units have limited voting rights and are not entitled to elect its general partner or its directors.
NEP's partnership agreement restricts the remedies available to holders of its common units for actions taken by its general partner that might otherwise constitute breaches of fiduciary duties.
NEP's partnership agreement restricts the voting rights of unitholders owning 10% or more of its common units.
NEP's partnership agreement replaces NEP GP's fiduciary duties to holders of NEP's common units with contractual standards governing its duties.
Even if holders of NEP's common units are dissatisfied, they cannot initially remove NEP GP, as NEP's general partner, without NEE's consent.
NEP GP's interest in NEP and the control of NEP GP may be transferred to a third party without unitholder consent.
The IDR Fee may be transferred to a third party without unitholder consent.
NEP may issue additional units without unitholder approval, which would dilute unitholder interests.
Reimbursements and fees owed to NEP GP and its affiliates for services provided to NEP or on NEP's behalf will reduce cash available for distribution to or from NEP OpCo and from NEP to NEP's common unitholders, and the amount and timing of such reimbursements and fees will be determined by NEP GP and there are no limits on the amount that NEP OpCo may be required to pay.
Discretion in establishing cash reserves by NextEra Energy Operating Partners GP, LLC (NEE Operating GP), the general partner of NEP OpCo, may reduce the amount of cash available for distribution to unitholders.
While NEP's partnership agreement requires NEP to distribute its available cash, NEP's partnership agreement, including provisions requiring NEP to make cash distributions, may be amended.
NEP OpCo can borrow money to pay distributions, which would reduce the amount of credit available to operate NEP's business.
Increases in interest rates could adversely impact the price of NEP's common units, NEP's ability to issue equity or incur debt for acquisitions or other purposes and NEP's ability to make cash distributions at intended levels.
The price of NEP's common units may fluctuate significantly and unitholders could lose all or part of their investment and a market that will provide unitholders with adequate liquidity may not develop.
The liability of holders of NEP's common units, which represent limited partner interests in NEP, may not be limited if a court finds that unitholder action constitutes control of NEP's business.
Unitholders may have liability to repay distributions that were wrongfully distributed to them.
Except in limited circumstances, NEP GP has the power and authority to conduct NEP's business without unitholder approval.
Contracts between NEP, on the one hand, and NEP GP and its affiliates, on the other hand, will not be the result of arm's-length negotiations.
Common unitholders will have no right to enforce the obligations of NEP GP and its affiliates under agreements with NEP.
NEP GP decides whether to retain separate counsel, accountants or others to perform services for NEP.
The New York Stock Exchange does not require a publicly traded limited partnership like NEP to comply with certain of its corporate governance requirements.

Taxation Risks
NEP's future tax liability may be greater than expected if NEP does not generate net operating losses (NOLs) sufficient to offset taxable income or if tax authorities challenge certain of its tax positions.
NEP's ability to utilize its NOLs to offset future income may be limited.
NEP will not have complete control over its tax decisions.
A valuation allowance may be required for NEP's deferred tax assets.
Distributions to unitholders may be taxable as dividends.

Website Access to U.S. Securities and Exchange Commission (SEC) Filings.  NEP makes its SEC filings, including the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, available free of charge on NEP's internet website, www.nexteraenergypartners.com, as soon as reasonably practicable after those documents are electronically filed with or furnished to the SEC.  The information and materials available on NEP's website are not incorporated by reference into this Form 10-Q.  The SEC maintains an internet website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at www.sec.gov.


5


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

NextEra Energy Partners, LP
Balance Sheet
(unaudited)

 
As of 
 June 30, 2014
Partners’ equity
 
General partner
$
10,000

General partner contribution receivable
(10,000
)
Limited partner
100

Limited partner contribution receivable
(100
)
Total partners’ equity
$












































The accompanying notes are an integral part of the balance sheet.


6


NEXTERA ENERGY PARTNERS, LP
NOTES TO BALANCE SHEET
As of June 30, 2014 (unaudited)


1.  ORGANIZATION AND NATURE OF BUSINESS

NEP was formed as a Delaware limited partnership on March 6, 2014 as an indirect wholly owned subsidiary of NEE, a Florida corporation.  NEP was formed to be a growth-oriented limited partnership that would own, operate and acquire clean and contracted generation assets with stable long-term cash flows.  On July 1, 2014, NEP completed its initial public offering (Offering) of common units, representing limited partner interests.  NEP's outstanding common units after the Offering are described in Note 3.  Immediately prior to the completion of the Offering, NEP acquired a portfolio of contracted renewable energy assets totaling approximately 990 megawatts (MW).  

2.  SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

Basis of presentation— NEP’s balance sheet has been prepared in accordance with accounting principles generally accepted in the U.S. Separate statements of income, changes in partners’ equity and cash flows have not been presented in the financial statements because there have been no activities of NEP other than those related to its formation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair financial statement presentation have been made.

3.  INITIAL PUBLIC OFFERING

On July 1, 2014, NEP completed its Offering by issuing 18,687,500 common units at a price to the public of $25 per common unit.  The proceeds from the Offering, net of underwriting discounts, commissions and structuring fees, were approximately $438.3 million, of which NEP used approximately $288.3 million to purchase 12,291,593 common units of NEP OpCo from NextEra Energy Equity Partners, LP (NEE Equity) and approximately $150 million to purchase 6,395,907 NEP OpCo common units from NEP OpCo, which will use the net proceeds for general corporate purposes, including to fund future acquisition opportunities.  After the application of the net proceeds from the Offering, NEP owns a 20.1% limited partnership interest in NEP OpCo.

On July 1, 2014, NEP OpCo and its direct subsidiaries (Loan Parties) entered into a $250 million variable rate, senior secured revolving credit facility that expires in July 2019 (revolving credit facility). The revolving credit facility includes borrowing capacity for letters of credit and incremental commitments to increase the revolving credit facility to up to $1 billion in the aggregate, subject to certain conditions. Borrowings under the revolving credit facility can be used by the Loan Parties to fund working capital and expansion projects, to make acquisitions and for general business purposes. Loans outstanding in U.S. dollars under the revolving credit facility will bear interest at either (i) a base rate, which will be the highest of (x) the federal funds rate plus 0.50%, (y) the administrative agent’s prime rate or (z) the one-month London Interbank Offered Rate (LIBOR) plus 1.0%, in each case, plus an applicable margin; or (ii) one-, two-, three- or six-month LIBOR plus an applicable margin. Loans outstanding in Canadian dollars will bear interest at either (i) a Canadian prime rate, which will be the higher of (x) the Canadian prime rate of a Canadian branch of the administrative agent and (y) the one-month Canadian Dealer Offered Rate (CDOR) plus 1.0%, in each case, plus an applicable margin; or (ii) one-, two-, three- or six-month CDOR plus an applicable margin. The revolving credit facility will be subject to a facility fee ranging from 0.375% to 0.50% per annum depending on NEP OpCo’s leverage ratio (as defined in the revolving credit facility). The revolving credit facility is secured by liens on the assets of NEP OpCo, and certain other assets of, and the ownership interest in, one of its direct subsidiaries, including wind and solar generating facilities with a total generating capability of approximately 990 megawatts. The revolving credit facility contains default and related acceleration provisions relating to the failure to make required payments or to observe other covenants in the revolving credit facility and related documents. Additionally, NEP OpCo and one of its direct subsidiaries are required to comply with certain financial covenants on a quarterly basis and NEP OpCo's ability to pay cash distributions is subject to certain other restrictions. All borrowings under the revolving credit facility are guaranteed by NEP OpCo and NEP, and must be repaid by the end of the revolving credit term.



7


NEXTERA ENERGY PARTNERS, LP (PREDECESSOR)
CONDENSED COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
OPERATING REVENUES
$
86,724

 
$
34,462

 
$
146,222

 
$
66,408

OPERATING EXPENSES

 

 

 

Operations and maintenance
15,485

 
5,942

 
26,701

 
14,045

Depreciation and amortization
18,761

 
8,220

 
35,197

 
16,028

Transmission expense
540

 
526

 
1,083

 
1,051

Taxes other than income taxes and other
1,527

 
931

 
2,765

 
1,781

Total operating expenses
36,313

 
15,619

 
65,746

 
32,905

OPERATING INCOME
50,411

 
18,843

 
80,476

 
33,503

OTHER INCOME (DEDUCTIONS)

 

 

 

Interest expense
(23,619
)
 
(9,789
)
 
(42,367
)
 
(19,887
)
Gain on settlement of contingent consideration of project acquisition

 
4,809

 

 
4,809

Other—net
68

 
48

 
92

 
43

Total other deductions—net
(23,551
)
 
(4,932
)
 
(42,275
)
 
(15,035
)
INCOME BEFORE TAXES
26,860

 
13,911

 
38,201

 
18,468

INCOME TAXES
4,691

 
6,213

 
10,687

 
11,165

NET INCOME
$
22,169

 
$
7,698

 
$
27,514

 
$
7,303

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

 

 

Net unrealized gains (losses) on cash flow hedges:

 

 

 

Effective portion of net unrealized gains (losses) (net of income tax expense/(benefit) ($2,436), $3,395, ($4,336) and $4,725, respectively)
(5,152
)
 
5,279

 
(8,253
)
 
7,626

Reclassification from accumulated other comprehensive loss to net income (net of income tax expense $372, $399, $748 and $754, respectively)
577

 
588

 
1,192

 
1,215

Unrealized gains (losses) on foreign currency translation
3,893

 
(12,179
)
 
(2,993
)
 
(20,309
)
Total other comprehensive loss, net of tax
(682
)
 
(6,312
)
 
(10,054
)
 
(11,468
)
COMPREHENSIVE INCOME (LOSS)
$
21,487

 
$
1,386

 
$
17,460

 
$
(4,165
)















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


8


NEXTERA ENERGY PARTNERS, LP (PREDECESSOR)
CONDENSED COMBINED BALANCE SHEETS
(in thousands)
(unaudited)

 
 
June 30, 2014
 
December 31, 2013
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
107,095

 
$
26,580

Accounts receivable
 
63,039

 
203,072

Restricted cash
 
344,583

 
2,370

Prepaid expenses
 
1,583

 
1,392

Other current assets
 
7,863

 
6,178

Total current assets
 
524,163

 
239,592

Non-current assets:
 
 
 
 
Property, plant and equipment, net
 
2,087,810

 
1,755,711

Construction work in progress
 
164,037

 
542,052

Deferred income taxes
 
32,955

 
29,010

Other non-current assets
 
67,487

 
66,586

Total non-current assets
 
2,352,289

 
2,393,359

TOTAL ASSETS
 
$
2,876,452

 
$
2,632,951

LIABILITIES AND MEMBERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and accrued expenses
 
$
37,517

 
$
42,489

Due to related parties
 
32,837

 
15,153

Current maturities of long-term debt
 
396,037

 
370,251

Accrued interest
 
22,130

 
16,052

Other current liabilities
 
13,376

 
10,333

Total current liabilities
 
501,897

 
454,278

Non-current liabilities:
 
 
 
 
 Long-term debt
 
1,839,241

 
1,429,370

Asset retirement obligation
 
16,249

 
14,901

Other non-current liabilities
 
40,841

 
26,986

Total non-current liabilities
 
1,896,331

 
1,471,257

TOTAL LIABILITIES
 
2,398,228

 
1,925,535

COMMITMENTS AND CONTINGENCIES
 

 

MEMBERS’ EQUITY:
 
 
 
 
Additional paid-in capital
 
417,908

 
664,560

Retained earnings
 
85,874

 
58,360

Accumulated other comprehensive loss
 
(25,558
)
 
(15,504
)
TOTAL MEMBERS’ EQUITY
 
478,224

 
707,416

TOTAL LIABILITIES AND MEMBERS’ EQUITY
 
$
2,876,452

 
$
2,632,951










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

9


NEXTERA ENERGY PARTNERS, LP (PREDECESSOR)
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
Six Months Ended June 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
27,514

 
$
7,303

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

 

Depreciation and amortization
35,197

 
16,028

Intangible amortization
(232
)
 
(253
)
Amortization of deferred financing costs
3,088

 
1,422

Deferred income taxes
10,687

 
11,165

Gain on settlement of contingent consideration for project acquisition

 
(4,809
)
Loss on disposal of assets

 
40

Changes in operating assets and liabilities:

 

Accounts receivable
(16,626
)
 
6,629

Prepaid expenses and other current assets
(2,603
)
 
3,162

Other non-current assets
121

 
(41
)
Accounts payable and accrued expenses
1,039

 
4,343

Due to related parties
13,630

 
4

Other current liabilities
12,637

 
(3,066
)
Other non-current liabilities
123

 
547

Net cash provided by operating activities
84,575

 
42,474

CASH FLOWS FROM INVESTING ACTIVITIES

 

Capital expenditures
(90,474
)
 
(364,155
)
Proceeds from convertible investment tax credits
306,240

 

Proceeds from asset disposals

 
38

Changes in restricted cash
(344,011)

 
207,284

Insurance proceeds
321

 
4,038

Net cash used in investing activities
(127,924
)
 
(152,795
)
CASH FLOWS FROM FINANCING ACTIVITIES

 

Member contributions
362,426

 
191,412

Member distributions
(235,657
)
 
(72,936
)
Issuances of long-term debt
14,748

 

Deferred financing costs

 
(510
)
Retirements of long-term debt
(18,718
)
 
(12,295
)
Payment of contingent consideration for project acquisition

 
(3,675
)
Net cash provided by financing activities
122,799

 
101,996

Effect of exchange rate changes on cash
1,065

 
(432
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
80,515

 
(8,757
)
CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD
26,580

 
21,028

CASH AND CASH EQUIVALENTS—END OF PERIOD
$
107,095

 
$
12,271

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

Cash paid for interest, net of amounts capitalized
$
21,270

 
$
20,968

Members’ noncash contributions for construction costs and other expenditures
$
107,543

 
$
72,090

Members’ net distributions for CITC payments
$

 
$
66,834

Change in accrued CITC that results in a reduction to property, plant and equipment
$
149,945

 
$

Members’ noncash distributions
$
480,964

 
$
8,424

New asset retirement obligation additions
$
986

 
$
272

Net change in accrued but not paid for capital expenditures
$
(19,033
)
 
$
126,036






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

10


NEXTERA ENERGY PARTNERS, LP (PREDECESSOR)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(unaudited)


The accompanying unaudited condensed combined financial statements represent the combination of the assets that NEP acquired and were prepared using NEE’s historical basis in the assets and liabilities.  For purposes of the unaudited condensed combined financial statements, the term NEP represents the accounting predecessor, or the combination of the acquired projects.

The accompanying unaudited condensed combined financial statements should be read in conjunction with NEP’s combined financial statements for the years ended December 31, 2013 and 2012 contained in NEP’s prospectus filed pursuant to Rule 424(b) under the Securities Act with the SEC on June 26, 2014 (Prospectus).  In the opinion of NEP management, all adjustments (consisting of normal recurring accruals) considered necessary for fair financial statement presentation have been made. The results of operations for an interim period generally will not give a true indication of results for the year, and the results of operations for the accounting predecessor are not indicative of the actual level of expense that would have been incurred had NEP operated as an independent, publicly-traded company during the period prior to the completion of the Offering.

1.  ORGANIZATION AND NATURE OF BUSINESS

NEP was formed as a Delaware limited partnership on March 6, 2014 as an indirect wholly owned subsidiary of NEE, a Florida corporation.  NEP was formed to be a growth-oriented limited partnership that would own, operate and acquire clean and contracted generation assets with stable long-term cash flows.

On July 1, 2014, NEP completed its Offering by issuing 18,687,500 common units at a price to the public of $25 per unit.  The proceeds from the Offering, net of underwriting discounts, commissions and structuring fees, were approximately $438.3 million, of which NEP used approximately $288.3 million to purchase 12,291,593 common units of NEP OpCo from NEE Equity and approximately $150 million to purchase 6,395,907 NEP OpCo common units from NEP OpCo, which will use the net proceeds for general corporate purposes, including to fund future acquisition opportunities.  After the application of the net proceeds from the Offering, NEP owns a 20.1% limited partnership interest in NEP OpCo.

In connection with the Offering, NEP acquired the following portfolio of clean, contracted renewable energy assets (initial portfolio):

Project
 
Commercial
Operation Date
 
Resource
 
MW
 
Counterparty
 
Contract
Expiration
 
Project Financing
(Maturity)
Northern Colorado
 
September 2009
 
Wind
 
174.3
 
Public Service Company of Colorado
 
2029 (22.5 MW) /
2034 (151.8 MW)
 
Mountain Prairie (2030)
Elk City
 
December 2009
 
Wind
 
98.9
 
Public Service Company of Oklahoma
 
2030
 
Mountain Prairie (2030)
Moore
 
February 2012
 
Solar
 
20.0
 
Ontario Power Authority
 
2032
 
St. Clair (2031)
Sombra
 
February 2012
 
Solar
 
20.0
 
Ontario Power Authority
 
2032
 
St. Clair (2031)
Perrin Ranch
 
January 2012
 
Wind
 
99.2
 
Arizona Public Service Company
 
2037
 
Canyon Wind (2030)
Conestogo
 
December 2012
 
Wind
 
22.9
 
Ontario Power Authority
 
2032
 
Trillium (2033)
Tuscola Bay
 
December 2012
 
Wind
 
120.0
 
DTE Electric Company
 
2032
 
Canyon Wind (2030)
Summerhaven
 
August 2013
 
Wind
 
124.4
 
Ontario Power Authority
 
2033
 
Trillium (2033)
Genesis
 
November 2013 (125.0 MW)/
March 2014 (125.0 MW)
 
Solar
 
250.0
 
Pacific Gas & Electric Co.
 
2039
 
Genesis (2038)
Bluewater
 
July 2014
 
Wind
 
59.9
 
Ontario Power Authority
 
2034
 
Bluewater (2032)
Total
 
 
 
 
 
989.6
 
 
 
 
 
 

2.  Long-Term Debt

During the second quarter of 2014, subsidiaries of NEP issued approximately $280 million principal amount of 5.60% limited-recourse senior secured amortizing notes maturing in September 2038 related to the Genesis project.  The proceeds were used primarily to reimburse NEER for a portion of the costs associated with the construction of the solar thermal generating facility, and are included as noncash activity in NEP's condensed combined statements of cash flows..  The notes are secured by liens on the equity interests in Genesis Solar Funding, LLC and its wholly-owned subsidiary, which indirectly owns the Genesis Solar project, a 250 megawatt utility-scale concentrating solar thermal generating facility located in California.

In June 2014, subsidiaries of NEP also entered into and borrowed approximately C$170 million (approximately $157 million) under a Canadian limited-recourse senior secured variable rate term loan agreement related to its Bluewater project that matures in 2032.  Interest on the loan is based on the applicable Canadian Dealer Offered Rate plus a specified margin and is payable

11

NEXTERA ENERGY PARTNERS, LP (PREDECESSOR)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
(unaudited)



quarterly.  Principal on the loan will be payable semi-annually.  In connection with the borrowing, Bluewater entered into an interest rate swap to hedge against interest rate movements with respect to substantially all interest payments on the loan. Substantially all of the loan proceeds were used to repay, in part, a loan from a Canadian subsidiary of NEER, and are included as noncash activity in NEP's condensed combined statements of cash flows.  The loan is secured by liens on the wind generating facility's assets and certain other assets of, and the ownership interest in, Bluewater, which owns the facility.

Both debt agreements contain default and related acceleration provisions relating to the failure to make required payments or to observe other covenants in the loan agreement and related documents, actions by the NEP subsidiaries or by other parties under specified agreements relating to the generating facility or the debt agreements, the termination of certain of such specified agreements and certain bankruptcy-related events.

3.  SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

Revenue—Revenue recognized for the three and six months ended June 30, 2014 and 2013, includes revenues from operations located outside of the U.S.  This revenue was approximately $19.0 million and $10.9 million for the three months ended June 30, 2014 and 2013, respectively, and $41.0 million and $17.7 million for the six months ended June 30, 2014 and 2013, respectively.

In May 2014, the Financial Accounting Standards Board issued a new accounting standard which provides guidance on the recognition of revenue from contracts with customers and requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows from an entity's contracts with customers. The standard is effective for NEP beginning January 1, 2017.  NEP is currently evaluating the effect the adoption of this standard will have, if any, on its financial statements.

Inventories— Spare parts inventories are stated at the lower of weighted average cost or market and are included in other current assets in NEP’s condensed combined balance sheets.  Spare parts inventory was $5.6 million and $4.3 million as of June 30, 2014 and December 31, 2013, respectively.

Property, Plant and Equipment, net—Property, plant and equipment consists primarily of development, engineering and construction costs for the renewable energy assets, equipment, land, substations and transmission lines.  Property, plant and equipment, excluding land, is recorded at cost and depreciated on a straight-line basis over their estimated useful lives ranging from three to 30 years, commencing on the date the assets are placed in service.  Maintenance and repairs of property, plant and equipment are charged to operations and maintenance expenses, as incurred.

Convertible Investment Tax Credits (CITCs) of $595.1 million and $445.1 million as of June 30, 2014 and December 31, 2013, respectively, are recorded as a reduction in property, plant and equipment, net in the condensed combined balance sheets and are amortized as a corresponding reduction to depreciation expense over the estimated life of the related asset. As of June 30, 2014, NEP had recorded a CITC receivable of $24.1 million associated with the Genesis project, which is included in accounts receivable on NEP's condensed combined balance sheets.

Total net long-lived assets held by operations outside the U.S. amounted to approximately $753.0 million and $625.9 million, respectively, as of June 30, 2014 and December 31, 2013.

Construction Work in Progress—Construction work in progress includes construction materials, turbine generators, solar panel assemblies and other equipment, third-party engineering costs, capitalized interest and other costs directly associated with the development and construction of the various projects.  Upon commencement of plant operations, costs associated with construction work in progress are transferred to property, plant and equipment, net.

Construction work in progress decreased and property, plant and equipment, net and CITCs increased at June 30, 2014, primarily due to the second unit of the Genesis facility going into service in March 2014.

4.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY

NEP recognizes all derivative instruments, when required to be marked to market, on the balance sheet as either assets or liabilities and measures them at fair value each reporting period. In connection with its debt financings in September 2012 and June 2014, NEP entered into interest rate swap agreements to manage interest rate cash flow risk.  Under the interest rate swap agreements, NEP pays a fixed rate of interest and receives a floating rate of interest over the term of the agreements without the exchange of the underlying notional amounts.  These agreements allow NEP to offset the variability of its floating-rate loan interest cash flows with the variable interest cash flows received from the interest rate swap agreements.  The commencement and termination dates of the interest rate swap agreements and the related hedging relationship coincide with the corresponding dates of the underlying variable-rate debt instruments, which mature in 2030 and 2032.  As of June 30, 2014 and December 31, 2013, the combined notional amounts of the swap agreements were approximately $355.7 million and $211.8 million, respectively.  In order to apply hedge accounting, the transactions must be designated as hedges and must be highly effective in offsetting the hedged risk.  For interest rate swaps, generally NEP assesses a hedging instrument’s effectiveness by using non-statistical methods including dollar value

12

NEXTERA ENERGY PARTNERS, LP (PREDECESSOR)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
(unaudited)

comparisons of the change in the fair value of the derivative to the change in the fair value or cash flows of the hedged item.  Hedge effectiveness is tested at the inception of the hedge and on at least a quarterly basis throughout the hedge’s life.  The effective portion of changes in the fair value of derivatives accounted for as cash flow hedges are deferred and recorded as a component of accumulated other comprehensive income (AOCI).  The amounts deferred in AOCI are recognized in earnings when the hedged transactions occur.  Any amounts excluded from the assessment of hedge effectiveness, as well as the ineffective portion of the gain or loss, is reported in current earnings.

Approximately $5.1 million of net losses included in AOCI at June 30, 2014, is expected to be reclassified into interest expense within the next 12 months as interest payments are made.  Such amount assumes no change in interest rates.  Cash flows from these interest rate swap contracts are reported in cash flows from operating activities in NEP's condensed combined statements of cash flows.

The fair values of NEP's derivative instruments designated as cash flow hedging instruments are included in NEP's condensed combined balance sheets as follows:

 
June 30, 2014
 
December 31, 2013
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(millions)
Interest rate swaps:
 
Other non-current assets
$
11.2

 
$

 
$
18.2

 
$

Other current liabilities
$

 
$
5.1

 
$

 
$
3.7

Other non-current liabilities
$

 
$
2.3

 
$

 
$


Gains (losses) related to NEP's cash flow hedges are recorded in NEP's condensed combined financial statements as follows:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(millions)
Interest rate swaps:
 
Gains (losses) recognized in other comprehensive income
$
(7.6
)
 
$
8.7

 
$
(12.6
)
 
$
12.3

Losses reclassified from AOCI to net income(a)
$
0.9

 
$
1.0

 
$
1.9

 
$
2.0

____________________
(a)  Included in interest expense.

5.  FAIR VALUE MEASUREMENTS

The fair value of assets and liabilities are determined using either unadjusted quoted prices in active markets (Level 1) or pricing inputs that are observable (Level 2) whenever that information is available and using unobservable inputs (Level 3) to estimate fair value only when relevant observable inputs are not available.  NEP uses several different valuation techniques to measure the fair value of assets and liabilities relying primarily on the market approach of using prices and other market information for identical or comparable assets and liabilities for those assets and liabilities that are measured at fair value on a recurring basis.  Certain financial instruments may be valued using multiple inputs including discount rates, counterparty credit ratings and credit enhancements.  NEP’s assessment of the significance of any particular input to the fair value measurement requires judgment and may affect the fair value measurement of its assets and liabilities and the placement of those assets and liabilities within the fair value hierarchy levels.  Non-performance risk, including the consideration of a credit valuation adjustment, is also considered in the determination of fair value for all assets and liabilities measured at fair value.  All transfers between fair value hierarchy levels occur at the beginning of the period in which the transfer occurred.

Cash Equivalents and Restricted Cash — Cash equivalents and restricted cash consist of short-term, highly liquid investments with original maturities of three months or less.  NEP primarily holds these investments in money market funds.  The fair value of these funds is calculated using current market prices.

Interest Rate Swaps — NEP estimates the fair value of its derivatives using a discounted cash flows valuation technique based on the net amount of estimated future cash inflows and outflows related to the swap agreements.  The primary inputs used in the fair value measurements include the contractual terms of the derivative agreements, current interest rates and credit spreads.

NEP’s financial assets and liabilities and other fair value measurements made on a recurring basis by fair value hierarchy level are as follows:

13

NEXTERA ENERGY PARTNERS, LP (PREDECESSOR)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
(unaudited)


 
June 30, 2014
 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(millions)

Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
$
107.1

 
$

 
$

 
$
107.1

 
$
26.6

 
$

 
$

 
$
26.6

Restricted cash
346.4

 

 

 
346.4

 
2.4

 

 

 
2.4

Interest rate swaps

 
7.6

 

 
7.6

 

 
14.5

 

 
14.5

Total assets
$
453.5

 
$
7.6

 
$

 
$
461.1

 
$
29.0

 
$
14.5

 
$

 
$
43.5

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
3.8

 
$

 
$
3.8

 
$

 
$

 
$

 
$

Total liabilities
$

 
$
3.8

 
$

 
$
3.8

 
$

 
$

 
$

 
$


Fair Value of Financial Instruments Recorded at the Carrying Amount — The carrying amounts of accounts receivable approximate their fair values.  The carrying amounts and estimated fair values of other financial instruments, excluding assets and liabilities which are recorded at fair value and disclosed above, are as follows:

 
June 30, 2014
 
December 31, 2013
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
(millions)
Notes receivable(a)
$
3.5

 
$
3.5

 
$
3.7

 
$
3.7

Long-term debt, including current maturities(b)
$
2,235.3

 
$
2,391.2

 
$
1,799.6

 
$
1,814.8

____________________
(a)
Primarily classified as held to maturity.  Fair value approximates carrying amount as they bear interest primarily at variable rates and have short to mid-term maturities (Level 2) and are included in other assets on the condensed combined balance sheet.
(b)
Fair value is estimated based on the borrowing rates as of each date for similar issues of debt with similar remaining maturities (Level 2).

6.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 
Accumulated Other Comprehensive Income (Loss)
 
Net Unrealized
Gains (Losses) on
Cash Flow Hedges
 
Net Unrealized
Gains (Losses) on
Foreign Currency
Translation
 
Total
 
(millions)
Three months ended June 30, 2014
 
 
 
 
 
Balances, March 31, 2014
$
6.4

 
$
(31.3
)
 
$
(24.9
)
Other comprehensive income (loss) before reclassification
(5.2
)
 
3.9

 
(1.3
)
Amounts reclassified from AOCI to interest expense
0.6

 

 
0.6

Net other comprehensive income (loss)
(4.6
)
 
3.9

 
(0.7
)
Balances, June 30, 2014
$
1.8

 
$
(27.4
)
 
$
(25.6
)


14

NEXTERA ENERGY PARTNERS, LP (PREDECESSOR)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
(unaudited)

 
Accumulated Other Comprehensive Income (Loss)
 
Net Unrealized
Gains (Losses) on
Cash Flow Hedges
 
Net Unrealized
Gains (Losses) on
Foreign Currency
Translation
 
Total
 
(millions)
Six months ended June 30, 2014
 
 
 
 
 
Balances, December 31, 2013
$
8.9

 
$
(24.4
)
 
$
(15.5
)
Other comprehensive income (loss) before reclassification
(8.3
)
 
(3.0
)
 
(11.3
)
Amounts reclassified from AOCI to interest expense
1.2

 

 
1.2

Net other comprehensive loss
(7.1
)
 
(3.0
)
 
(10.1
)
Balances, June 30, 2014
$
1.8

 
$
(27.4
)
 
$
(25.6
)

7.  INCOME TAXES

The effective tax rate for the three months ended June 30, 2014 and 2013, is 17.5% and 44.7%, respectively and for the six months ended June 30, 2014 and 2013 is 28.0% and 60.5%, respectively.  The effective tax rate is affected by recurring items, such as the relative amount of income earned in jurisdictions, the 50% tax basis reduction due to CITCs that are recognized when assets are placed into service, and valuation allowances on deferred tax assets.

A reconciliation of income tax at the U.S. federal statutory rate to income tax expense is as follows:

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(millions)
Income tax expense at 35% statutory rate
$
9.4

 
$
4.9

 
$
13.4

 
$
6.5

Increases (reductions) resulting from:
 
 
 
 
 
 
 
State income taxes—net of federal tax benefit
0.4

 
0.4

 
0.9

 
0.9

CITCs(1)
(5.9
)
 
(5.5
)
 
(12.4
)
 
(10.1
)
Valuation allowance(1)
0.4

 
7.6

 
10.9

 
15.3

Effect of flow through entities and foreign tax differential(2)
0.3

 
(1.1
)
 
(2.2
)
 
(1.4
)
Other
0.1

 
(0.1
)
 
0.1

 

Income tax expense
$
4.7

 
$
6.2

 
$
10.7

 
$
11.2

____________________
(1)
The changes in income tax expense resulting from CITCs and valuation allowances are primarily related to Genesis.
(2)
The Summerhaven and Conestogo project entities, as well as the Trillium entities, are Canadian limited partnerships, the partners of which are not predecessor entities and are therefore not included in the predecessor financial statements.  Because of their flow through nature, no income taxes have been provided with regard to these entities.  Foreign tax differential is the difference in taxes calculated on Canadian income from Canadian projects (excluding flow through entities) at Canadian statutory rates compared to the U.S. statutory rate.

8.  INTANGIBLE LIABILITIES

NEP’s intangible liabilities are the result of an acquisition in 2012.  That acquisition resulted in the St. Clair project assuming liabilities for the acquired RESOP Contracts.  The acquired value represents the fair value of the RESOP Contracts, which were out-of-the-money contracts, at the acquisition date.  The recorded intangible liabilities are amortized to operating revenues over the term of the RESOP Contracts through February 2032, according to the cash flow benefits or detriments associated with the contracts as determined at acquisition.  The liabilities as of June 30, 2014 and December 31, 2013 were $8.1 million and $8.3 million, respectively and are included in other non-current liabilities in the accompanying condensed combined balance sheets.  NEP recorded $0.1 million and $0.1 million of amortization for the three months ended June 30, 2014 and 2013, respectively, and $0.2 million and $0.3 million for the six months ended June 30, 2014 and 2013, respectively.  Estimated amortization over the next five years is approximately $0.5 million in each year.


15

NEXTERA ENERGY PARTNERS, LP (PREDECESSOR)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Concluded)
(unaudited)

9.  COMMITMENTS AND CONTINGENCIES

Land Use Commitments — The project owners are parties to various agreements that provide for payments to landowners for the right to use the land upon which the projects are located.  These leases and easements can typically be renewed by the Project Owners for numerous terms.  The annual fees range from minimum rent payments varying by lease to maximum rent payments of a certain percentage of gross revenues, varying by lease.  Total lease expense was $2.9 million and $1.6 million for the three months ended June 30, 2014 and 2013, respectively and $5.5 million and $4.3 million for the six months ended, respectively, and is classified as operations and maintenance expenses in NEP's accompanying condensed combined statements of operations and comprehensive income (loss).

Genesis’ land leases include a right-of-way lease/grant that provides for payments to the U.S. Bureau of Land Management (BLM) for the right to use the public lands upon which the project is located.  The lease may be renewed at expiration at Genesis’ option and will be subject to the regulations existing at the time of renewal.  As required by the terms of this lease, Genesis obtained a surety bond in favor of BLM for $23 million.  The surety bond will remain in effect until the BLM is satisfied that there is no outstanding liability on the bond or satisfactory replacement bond coverage is obtained.

As the base rent and the MW capacity fee payable to the BLM are both based on fair value, these payments are considered contingent rent and, therefore, expense is recognized as incurred.

The total minimum rental commitments at June 30, 2014 under these land use agreements are as follows:

Year Ending December 31,
 
Land Use
Commitments
 
 
(millions)
2014 (Remaining)
 
$
1.9

2015
 
3.9

2016
 
4.0

2017
 
4.0

2018
 
4.1

Thereafter
 
116.9

Total minimum land use payments
 
$
134.8


Development, Engineering, and Construction Commitments — Certain projects have several open engineering, procurement and construction (EPC) contracts procured to develop, engineer and construct the various solar- and wind-power generating facilities.  Those contracts have varying payment terms and some include performance obligations that allow the companies to receive liquidated damages if the contractor does not perform.  During the three months ended June 30, 2014, the projects purchased $27.2 million under these contracts, which costs have been capitalized in construction work in progress.  At June 30, 2014, Bluewater had several open EPC contracts related to the procurement of materials and services for the related projects.  As of June 30, 2014, total contract commitments were $222.6 million and the remaining commitment was $10.1 million.

Letter of Credit Facility — Genesis entered into a letter of credit (LOC) facility (LOC facility), under which the LOC lender may issue standby letters of credit not to exceed $82.9 million, with a maturity date of August 15, 2017.

The purpose and amounts of letters of credit outstanding as of June 30, 2014 are as follows:

LOC Facility Purpose
 
Amount
 
Outstanding Dates
 
 
(millions)
 
 
Operations & Maintenance Reserve
 
10.0

 
12/2/2013—Maturity
PPA Security
 
25.0

 
9/9/2011—Maturity
Large Generator Interconnection Agreement
 
11.7

 
9/23/2011—Maturity
Total
 
$
46.7

 
 



16


Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the Notes contained herein and Management's Discussion and Analysis of Financial Condition and Results of Operations (Management's Discussion) included in NEP's Prospectus.  The accompanying unaudited condensed combined financial statements represent the combination of the assets that NEP acquired and were prepared using NEE’s historical basis in the assets and liabilities.  For purposes of the unaudited condensed combined financial statements, the term NEP represents the accounting predecessor, or the combination of the acquired projects.  The results of operations for an interim period generally will not give a true indication of results for the year, and the results of operations for the accounting predecessor are not indicative of the actual level of expense that would have been incurred had NEP operated as an independent, publicly-traded company during the period prior to the completion of the Offering.  In the following discussion, all comparisons are with the corresponding items in the prior year period.

After the completion of the Offering, NEP owns a controlling, non-economic general partner interest and a 20.1% limited partner interest in NEP OpCo and NEE Equity owns a non-controlling 79.9% limited partner interest in NEP OpCo.  Financial results are shown on a 100% basis and are not adjusted to reflect NEE Equity’s non-controlling 79.9% limited partner interest in NEP OpCo.

The discussion and analysis below has been organized as follows:

overview, including a description of NEP's business and significant factors and trends that are important to understanding the results of operations and financial condition for the three and six months ended June 30, 2014;

results of operations, including an explanation of significant differences between the periods in the specific line items of the condensed combined statement of operations;

liquidity and capital resources, addressing liquidity position, sources and uses of cash, capital resources and requirements, commitments and off-balance sheet arrangements;

critical accounting policies, which are most important to both the portrayal of NEP's financial condition and results of operations, and which require management’s most difficult, subjective or complex judgments; and

quantitative and qualitative disclosures about market risk.


Overview

Company Description

NEP is a growth-oriented limited partnership formed by NEE to own, operate and acquire contracted clean energy projects with stable, long-term cash flows through NEP's limited partner interest in NEP OpCo.  NEP owns a controlling, non-economic general partner interest and a 20.1% limited partner interest in NEP OpCo.  NEP owns a portfolio of clean, contracted renewable assets consisting of ten wind and solar projects, nine of which were operational at June 30, 2014 and one which was placed in service in July 2014.

NEP intends to take advantage of favorable trends in the North American energy industry, including the ongoing trend of clean energy projects replacing aging or uneconomic projects, demand by utilities for renewable energy to meet state renewable portfolio standards (RPS) and the improving competitiveness of clean energy relative to other fuels.  NEP plans to focus on high-quality, long-lived projects operating under long-term contracts with creditworthy counterparties that are expected to produce stable long-term cash flows.  NEP believes its cash flow profile, geographic and technological diversity, cost-efficient business model and relationship with NEE will provide NEP with a significant competitive advantage and will enable NEP to execute its growth strategy.


17


The following table sets forth the projects in NEP's initial portfolio and their respective commercial operation date, nameplate capacity, energy sale counterparty, contract expiration and the name and maturity date of project financing agreements:

Project
 
Commercial
Operation Date
 
Resource
 
MW
 
Counterparty
 
Contract
Expiration
 
Project Financing
(Maturity)
Northern Colorado
 
September 2009
 
Wind
 
174.3
 
Public Service Company of Colorado
 
2029 (22.5 MW) /
2034 (151.8 MW)
 
Mountain Prairie (2030)
Elk City
 
December 2009
 
Wind
 
98.9
 
Public Service Company of Oklahoma
 
2030
 
Mountain Prairie (2030)
Moore
 
February 2012
 
Solar
 
20.0
 
Ontario Power Authority
 
2032
 
St. Clair (2031)
Sombra
 
February 2012
 
Solar
 
20.0
 
Ontario Power Authority
 
2032
 
St. Clair (2031)
Perrin Ranch
 
January 2012
 
Wind
 
99.2
 
Arizona Public Service Company
 
2037
 
Canyon Wind (2030)
Conestogo
 
December 2012
 
Wind
 
22.9
 
Ontario Power Authority
 
2032
 
Trillium (2033)
Tuscola Bay
 
December 2012
 
Wind
 
120.0
 
DTE Electric Company
 
2032
 
Canyon Wind (2030)
Summerhaven
 
August 2013
 
Wind
 
124.4
 
Ontario Power Authority
 
2033
 
Trillium (2033)
Genesis
 
November 2013 (125.0 MW)/
March 2014 (125.0 MW)
 
Solar
 
250.0
 
Pacific Gas & Electric Co.
 
2039
 
Genesis (2038)
Bluewater
 
July 2014
 
Wind
 
59.9
 
Ontario Power Authority
 
2034
 
Bluewater (2032)
Total
 
 
 
 
 
989.6
 
 
 
 
 
 


Significant Factors and Trends Affecting NEP's Business

NEP's results of operations and its ability to grow its business over time could be impacted by a number of factors and trends that affect NEP's industry generally, its initial portfolio and other projects it may acquire in the future.  These factors and trends include government incentives in the U.S. and Canada and the increasing competitiveness of renewable energy.

Government Incentives

Government incentives in the U.S. and Canada have the effect of making the development of clean energy projects more competitive by providing credits for a portion of the development costs or by providing favorable contract prices.  A loss or reduction in such incentives could decrease the attractiveness of clean energy projects to developers, including NEE, which could reduce NEP's future acquisition opportunities.  Such a loss or reduction could also reduce NEP's willingness to pursue or develop certain clean energy projects due to higher operating costs or decreased revenues under its PPAs, RESOP Contracts and FIT Contracts.

U.S. federal, state and local governments and utilities have established various incentives to support the development of renewable energy.  These incentives include accelerated tax depreciation, production tax credits (PTCs), investment tax credits (ITCs), cash grants and RPS programs.

Wind and solar projects qualify for the U.S. federal Modified Accelerated Cost Recovery System depreciation schedule.  This schedule allows a taxpayer to recognize the depreciation of tangible property on a five-year basis even though the useful life of such property is generally greater than five years.

The PTC is a U.S. federal incentive that provides a U.S. federal income tax credit on a cents per kilowatt-hour (kWh) basis for all qualifying energy produced by a qualifying U.S. wind project during the first ten years after the project commences commercial operations.  The PTC is no longer available for new wind projects unless they were “under construction” by the end of 2013 and the developer uses “continuous efforts” towards commencing commercial operations.  Under Internal Revenue Service (IRS) guidance, projects which were under construction by the end of 2013 and have commenced commercial operations by the end of 2015 will be deemed to have used continuous efforts.  The expiration of the PTC has not impacted and will not impact any of the projects in NEP's initial portfolio as none of the projects elected to receive PTCs.

The ITCs and CITCs are U.S. federal incentives that are available after a project commences commercial operations and provide an income tax credit or cash grant for up to 30% of eligible installed costs.  A solar project must commence commercial operations on or before December 31, 2016, to qualify for the 30% ITC.  A solar project that commences commercial operations after December 31, 2016, may qualify for an ITC equal to 10% of eligible installed costs.  Alternatively, in order to qualify for the CITC, a solar project must have begun construction by the end of 2011 and have commenced commercial operations on or before December 31, 2016.

NEE has applied for and received CITCs for Tuscola Bay, Perrin Ranch, Elk City, Northern Colorado and Genesis.  CITCs are treated as a 15% reduction (i.e., one half of the grant amount) to the tax basis of the property, plant and equipment and reduce the related depreciation over the useful life of the project.


18


RPS are state regulatory programs created by state legislatures to encourage the development of renewable energy.  They typically require utilities to produce or procure a certain percentage of their energy needs from renewable energy.  According to the DOE, twenty-nine states and the District of Columbia currently have an RPS in place and eight other states have non-binding goals supporting renewable energy.  Most states with mandatory RPS programs typically set a target between 10% and 30% of total energy capacity, while other states set a MW target to achieve their RPS goals.  Additionally, several states have pending legislation to adopt new RPS programs.  NEP expects RPS programs to continue to increase demand by utilities for renewable energy in order to meet state RPS requirements.

Canada. Canada is a world leader in the production and use of clean energy as a percentage of its total energy needs.  While a majority of Canada’s energy is produced by hydro energy, non-hydro renewable energy is providing an increasing proportion of energy generation each year.  Government incentives at the provincial level continue to drive the growth of renewable energy in Canada. Provincial governments have been supportive of renewable energy in general, and wind energy in particular, through renewable energy targets and incentive plans.

Ontario has been a leader in supporting the development of renewable energy in Canada.  Ontario's Long-Term Energy Plan, released in December 2013 by the Ontario Ministry of Energy, suggests that by 2025, 10.7 gigawatts of non-hydro renewable energy will be online in the province.

Increasing Competitiveness of Renewable Energy

Renewable energy technology and installation costs have improved meaningfully in recent years.  Wind technology has improved as a result of taller towers, longer blades and more efficient energy conversion equipment, which allow wind projects to more efficiently capture wind resource and produce more energy.  Over the last ten years technology improvements have decreased the cost of wind energy in the U.S. between 24% and 39% depending on wind speed, according to International Energy Agency estimates.  Solar technology is also improving as solar cell efficiencies improve and installation costs decline.  Since the start of 2010, the total average installed cost of utility-scale solar has declined over 50%, according to Bloomberg New Energy Finance.

Impact of increasingly stringent environmental rules and regulations on coal-fired generation

Traditional coal-fired plants emit greenhouse gases and other pollutants.  The U.S. Environmental Protection Agency (EPA) is responsible for implementing rules and regulations to protect the environment, including rules and regulations that limit emissions of greenhouse gases and other pollutants from coal-fired plants.  A number of new EPA rules are emerging that are expected to impact many coal-fired plants in the U.S. While there is some uncertainty as to the timing, requirements and compliance dates that will ultimately be imposed by these rules, NEP expects that the owners of some of the smaller, older or less efficient coal-fired plants will choose to decommission these facilities rather than make the significant financial investments in these plants that will be necessary to comply with environmental rules and regulations.  In addition, a continuation of lower natural gas prices will put additional pressure on these plants.  According to Bloomberg New Energy Finance, over 100 MW of coal-fired capacity will be retired in the U.S. by the end of 2020.

Significant Factors Affecting Results of Operations and Financial Condition

Significant factors that could affect NEP's results of operations and financial condition are:

wind and solar resource levels, weather conditions and the operational performance of NEP's initial portfolio;
timing of commencement of commercial operations of NEP's initial portfolio;
financings; and
operations and maintenance (O&M) expenses.

Wind and Solar Resource, Weather Conditions and the Performance of NEP's Initial Portfolio

Wind and solar resource levels, weather conditions and the performance of NEP's initial portfolio represent significant factors that could affect its operating results because these variables impact energy sales.

Energy produced from NEP's initial portfolio depends primarily on wind and solar resource levels, weather conditions at each project and the related impact of each on the performance of the projects.  NEP's energy production estimates are based on internal and third-party long-term meteorological information, which includes data collected from equipment located at the project in some cases, wind and solar data from other sources and equipment power curve estimates.

NEP's wind analysis evaluates wind speed and prevailing direction, atmospheric conditions, wake and seasonal variations for each project. NEP's solar analysis evaluates solar irradiance levels and prevailing direction, atmospheric conditions, and seasonal variations for each project.  The result of these analyses is a probabilistic assessment of a project’s energy production, which is expressed through “P levels.”  A P level is the amount of annual energy production that a particular project or group of projects will meet or exceed P% of the time.  For example, an annual P50 production level of 100 megawatt hours (MWh) means that a particular project or group of projects is expected to produce at least 100 MWh per year in 50 out of every 100 years.  Similarly, an annual P95 production level of 100 MWh means that a particular project or group of projects is expected to produce at least 100 MWh per

19


year in 95 out of 100 years.

NEP's revenue forecasts are based on resource variability of wind around a P50 production level measured on an annual basis.  A P50 production level is used as the foundation for NEP's financial forecast.  NEP uses P75, P90 and P95 production levels measured on an annual basis as sensitivities or potential variability of output relative to its financial forecast and expectations. In addition, NEP typically uses a P90 production level to determine the appropriate amount of indebtedness for each project.

As stated above, P50, P75, P90 and P95 variability analysis is measured on an annual basis.  Relative variability increases as the measurement period shortens, so it is likely that NEP will experience increased variability on a monthly or quarterly basis than on an annual basis.  Therefore, the monthly and quarterly cash flow and payout ratios are likely to reflect more variability when compared to the annual cash flow and payout ratios.  NEP also expects seasonal variability to occur.  NEP expects to use cash reserves and NEP OpCo’s revolving credit facility to help manage short-term production and cash flow variability and the related impact on cash available for distribution to its unitholders.

The variability of output of a portfolio of projects is less than the average of the individual variability of the projects.  This is referred to as the “portfolio effect.”  The larger and more diverse the portfolio, the lower the expected variability.  NEP's initial portfolio is large enough and diverse enough to produce a meaningful reduction in overall variability, as demonstrated in the following chart:

 
P95(1)
 
P90(1)
 
P75(1)
No portfolio effect
84%
 
87%
 
93%
Portfolio effect
88%
 
91%
 
95%
____________________
(1)  As a percentage of P50.

As shown in the table above, the portfolio effect results in a reduction in the production variability in NEP's initial portfolio.

NEP and its project lenders use annual energy production forecasts, including probability analysis, to evaluate the ability of a project to make debt service payments and to determine the nature and size of project-level debt and liquidity features, such as debt service reserves or letter of credit facilities.  To date, none of the projects in NEP's initial portfolio has been restricted from making distributions under the terms of the project-level financing agreements.  

Financings

NEP intends to use a portion of its cash flows for interest and principal payments on borrowings under various financing arrangements.  Interest expense reflects periodic interest on project-level debt of the initial portfolio and interest on borrowings, if any, under NEP OpCo’s revolving credit facility.  Changes in interest rates could impact the amount of interest due under these financings, to the extent the interest expense is not hedged under a swap agreement.

Principal payments under existing project financings are due on a semi-annual basis.  The following table shows certain of the characteristics of NEP's various project financings:

Project Financing
 
Principal Payments
 
Maturity
 
Principal Amount
Outstanding as of
June 30, 2014
(in millions)
 
Principal payments for Twelve Months  Ended
June 30, 2015
 
Principal Payable Thereafter(1)
 
 
 
 
 
 
 
 
(U.S. dollars in thousands)
Mountain Prairie
 
June and December
 
2030
 
$
283.9

 
$
8,304

 
$
275,615

St. Clair
 
February and August
 
2031
 
CAD 161.0

 
7,761

 
143,124

Canyon
 
March and September
 
2030
 
$
215.1

 
11,894

 
203,255

Trillium
 
February and August
 
2033
 
CAD 313.3

 
6,651

 
286,897

Genesis
 
February and August
 
2038
 
$
852.0

 
356,282

(2) 
495,718

Genesis
 
March and September
 
2038
 
$
280.0

 

 
280,000

Bluewater
 
June and December
 
2032
 
CAD 170.0

 
5,145

 
154,632

Total
 
 
 
 
 
 
 
$
396,037

 
$
1,839,241

____________________
(1)
The amortization of project financings is principally related to the length of the applicable PPA, FIT Contract or RESOP Contract.
(2)
Includes $337.1 million of mandatory prepayment of indebtedness using CITC proceeds or, to the extent of any shortfall in CITC proceeds, using equity contributions from NEER.


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Expenses

NEP's O&M expenses are expected to increase by approximately $4 million per year as a result of becoming a publicly-traded limited partnership.  This increase will be due, in part, to increased third-party accounting services, filing reports with the SEC, independent auditor fees, investor relations activities, directors’ fees, compensation and expenses, directors’ and officers’ insurance, stock exchange listing fees, registrar and transfer agent fees and other expenses.  NEP OpCo will reimburse NEP for such expenses.  Beginning in the third quarter of 2014, NEP financial statements will reflect the impact of these increased expenses, which will affect the comparability of NEP's accounting predecessor’s historical financial statements for periods prior to the completion of the Offering.

NEP OpCo’s O&M expenses are expected to increase by approximately $5.8 million per year as a result of the annual management fee equal to the greater of 1% of NEP OpCo’s EBITDA (net income plus interest expense, income tax expense, depreciation and amortization less certain non-cash, non-recurring items) or $4 million (as adjusted for inflation beginning in 2016), and the $1.8 million annual credit support fee, which will be paid by NEP OpCo in quarterly installments.  NEP's financial statements following the completion of the Offering will reflect the impact of this increased expense, which will affect the comparability of its accounting predecessor’s historical financial statements for periods prior to the completion of the Offering.

O&M expenses related to the initial portfolio are expected to remain relatively stable from year to year once all of the projects are operational.  However, O&M expenses are likely to be higher for the year ending December 31, 2014, as compared to historical periods due to the timing of commencement of commercial operations at a number of the projects in the initial portfolio, which will affect the comparability of NEP's accounting predecessor’s historical financial statements for periods prior to the completion of the Offering.  NEP's O&M expenses are likely to increase as it acquires new projects.

Results of Operations

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Statement of Operations Data:
 
 
 
Operating revenues
$
86,724

 
$
34,462

 
$
146,222

 
$
66,408

Operating expenses:
 
 
 
 
 
 
 
Operations and maintenance
15,485

 
5,942

 
26,701

 
14,045

Depreciation and amortization
18,761

 
8,220

 
35,197

 
16,028

Transmission
540

 
526

 
1,083

 
1,051

Taxes other than income taxes and other
1,527

 
931

 
2,765

 
1,781

Total operating expenses
36,313

 
15,619

 
65,746

 
32,905

Operating income
50,411

 
18,843

 
80,476

 
33,503

Other income (deductions):
 
 
 
 
 
 
 
Interest expense
(23,619
)
 
(9,789
)
 
(42,367
)
 
(19,887
)
Gain on settlement of contingent consideration of project acquisition

 
4,809

 

 
4,809

Other—net
68

 
48

 
92

 
43

Total deductions—net
(23,551
)
 
(4,932
)
 
(42,275
)
 
(15,035
)
Income before income taxes
26,860

 
13,911

 
38,201

 
18,468

Income taxes
4,691

 
6,213

 
10,687

 
11,165

Net income
$
22,169

 
$
7,698

 
$
27,514

 
$
7,303



21


Three Months Ended June 30, 2014, Compared to Three Months Ended June 30, 2013

Operating Revenues

Operating revenues primarily consist of income from the sale of energy under NEP's PPAs, RESOP Contracts and FIT Contracts.  Operating revenues increased $52.3 million during the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, primarily due to the commencement of commercial operations at Summerhaven in August 2013, Genesis Unit 1 in November 2013 and Genesis Unit 2 in March 2014.

 
Three Months Ended
June 30,
 
 
2014
 
2013
 
 
(dollars in thousands)
 
Operating revenues
$
86,724

 
$
34,462

 
Generation
698 GWh

(1) 
422 GWh

(1) 
____________________
(1)  gigawatt hours

Operating Expenses

Operations and Maintenance

O&M expenses include interconnection costs, labor expenses, turbine servicing costs, lease royalty payments, property taxes, insurance, materials, supplies, shared services and administrative expenses attributable to NEP's projects, and costs and expenses under administrative services agreements (ASAs) and O&M agreements.  O&M expenses also include the cost of maintaining and replacing certain parts for the projects in the initial portfolio to maintain, over the long-term, operating income or operating capacity.  O&M expense increased $9.5 million for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, primarily due to the commencement of commercial operations at Summerhaven in August 2013, Genesis Unit 1 in November 2013 and Genesis Unit 2 in March 2014.  In addition, O&M expenses increased $2.6 million due to costs associated with the formation of certain entities, which were funded by NEER through an equity contribution.

Depreciation and Amortization

Depreciation and amortization expense reflects costs associated with depreciation and amortization of NEP's assets, based on consistent depreciable asset lives and depreciation methodologies.  For all of the U.S. projects, NEP elected to receive CITCs, which are recorded as a reduction in property, plant and equipment, net on the condensed combined balance sheets and are amortized as a reduction to depreciation and amortization expense over the estimated life of the related property.  Depreciation expense also includes a provision for wind and solar facility dismantlement, interim asset removal costs and accretion related to asset retirement obligations.

Depreciation and amortization increased $10.5 million during the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, primarily due to the commencement of commercial operations at Summerhaven in August 2013, Genesis Unit 1 in November 2013 and Genesis Unit 2 in March 2014.

Other Income (Deductions)

Interest Expense

Interest expense primarily consists of interest accrued under project financings, partially offset by interest capitalization on qualified expenditures.  Interest expense increased $13.8 million during the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, primarily due to entering into a financing (Trillium) for the Conestogo and Summerhaven Projects for approximately CAD 315 million in December 2013, $150 million of incremental borrowings under Genesis' bank loan and a new financing of $280 million for the Genesis project in June 2014, as well as lower capitalized interest associated with the conclusion of construction of Genesis Unit 1 in November 2013 and Genesis Unit 2 in March 2014.

Gain on Settlement of Contingent Consideration of Project Acquisition

Gain on settlement of contingent consideration of project acquisition decreased $4.8 million during the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, primarily due to a change in estimate relating to the contingent consideration related to the acquisition of the Moore and Sombra projects.


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Income Taxes

Income taxes are calculated using the separate return method for each of the project entities that are structured as limited liability companies or corporations.  Income taxes are not included for entities that are structured as flow through entities (partnerships).  Income tax expense includes federal, state and Canadian taxes on operations, as applicable.

Income tax expense decreased $1.5 million during the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, primarily resulting from a decrease in the valuation allowance on deferred tax assets of $7.2 million mainly related to Genesis, and an increase in deferred tax assets related to CITCs on Genesis of $0.4 million, partially offset by an increase of $1.0 million related to flow through entities and an increase of $4.5 million due to higher pretax book income.

NEP's effective tax rate for the three months ended June 30, 2014 and 2013, was 17.5% and 44.7%, respectively.  The effective tax rate is affected by recurring items, such as the relative amount of income earned in jurisdictions, the 50% tax basis reduction due to CITCs, which are recognized when assets are placed into service, and valuation allowances on deferred tax assets.  The 27.2% decrease in the tax rate from the three months ended June 30, 2013, to the three months ended June 30, 2014, is largely caused by the impact of changes in valuation allowances and the 50% basis reduction on the receipt of CITCs.

The effective tax rate decreased 27.2% in the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 due to:

State income taxes
(1.4
)%
Change in valuation allowances(1)
(53.5
)%
50% basis reduction due to CITCs(1)
17.8
 %
Foreign rate differential and effect of flow-through(2)
9.3
 %
Other
0.6
 %
Total Change
(27.2
)%
____________________
(1)
The changes relating to CITCs and valuation allowances are primarily related to Genesis.
(2)
The Summerhaven and Conestogo project entities, as well as the Trillium entities, are Canadian limited partnerships, the partners of which are not predecessor entities and are therefore not included in the predecessor financial statements.  Because of their flow through nature, no income taxes have been provided with regard to these entities.  Foreign rate differential is the difference in taxes calculated on Canadian income from Canadian projects (excluding flow through entities) at Canadian statutory rates compared to the U.S. statutory rate.


Six Months Ended June 30, 2014, Compared to Six Months Ended June 30, 2013

Operating Revenues

Operating revenues primarily consist of income from the sale of energy under NEP's PPAs, RESOP Contracts and FIT Contracts.  Operating revenues increased approximately $79.8 million during the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, primarily due to the commencement of commercial operations at Summerhaven in August 2013, Genesis Unit 1 in November 2013 and Genesis Unit 2 in March 2014.

 
Six Months Ended
June 30,
 
2014
 
2013
 
(dollars in thousands)
Operating revenues
$
146,222

 
$
66,408

Generation
1,346 GWh

 
873 GWh


Operating Expenses

Operations and Maintenance

O&M expenses include interconnection costs, labor expenses, turbine servicing costs, lease royalty payments, property taxes, insurance, materials, supplies, shared services and administrative expenses attributable to NEP's projects, and costs and expenses under ASAs and O&M agreements.  O&M expenses also include the cost of maintaining and replacing certain parts for the projects in the initial portfolio to maintain over the long-term, operating income or operating capacity.  O&M expenses increased approximately $12.7 million for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, primarily due to the commencement of commercial operations at Summerhaven in August 2013, Genesis Unit 1 in November 2013 and Genesis Unit 2 in March 2014.  In addition, O&M expenses increased $2.6 million due to costs associated with the formation of certain entities, which were funded by NEER through an equity contribution.

23



Depreciation and Amortization

Depreciation and amortization expense reflects costs associated with depreciation and amortization of NEP's assets, based on consistent depreciable asset lives and depreciation methodologies.  For all of NEP's U.S. projects, CITCs were elected, which are recorded as a reduction in property, plant and equipment, net on the condensed combined balance sheets and are amortized as a reduction to depreciation and amortization expense over the estimated life of the related property.  Depreciation expense also includes a provision for wind and solar facility dismantlement, interim asset removal costs and accretion related to asset retirement obligations. Depreciation and amortization increased approximately $19.2 million during the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, primarily due to the commencement of commercial operations at Summerhaven in August 2013, Genesis Unit 1 in November 2013 and Genesis Unit 2 in March 2014.  

Other Income (Deductions)

Interest Expense

Interest expense primarily consists of interest accrued under the project financings, partially offset by interest capitalization on qualified expenditures.  Interest expense increased approximately $22.5 million during the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, primarily due to entering into a financing (Trillium) for the Conestogo and Summerhaven Projects for approximately CAD 315 million in December 2013, $150 million of incremental borrowings under Genesis' bank loan and a new financing of $280 million for the Genesis project in June 2014, as well as lower capitalized interest associated with the conclusion of construction of Genesis Unit 1 in November 2013 and Genesis Unit 2 in March 2014.

Gain on Settlement of Contingent Consideration of Project Acquisition

Gain on settlement of contingent consideration of project acquisition decreased $4.8 million during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily due to a change in estimate relating to the contingent consideration related to the acquisition of the Moore and Sombra projects.

Income Taxes

Income taxes are calculated using the separate return method for each of the project entities that are structured as limited liability companies or corporations.  Income taxes are not included for entities that are structured as flow through entities (partnerships).  Income tax expense includes federal, state and Canadian taxes on operations, as applicable.

Income tax expense decreased $0.5 million for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, primarily resulting from a decrease in the valuation allowance on deferred tax assets of $4.4 million mainly related to Genesis, an increase in deferred tax assets related to CITCs on Genesis of $2.3 million, a decrease of $1.2 million related to flow through entities, partially offset by an increase of $6.9 million due to higher pretax book income.

NEP's effective tax rate for the six months ended June 30, 2014 and 2013, was 28.0% and 60.5%, respectively.  The effective tax rate is affected by recurring items, such as the relative amount of income NEP earns in jurisdictions, the 50% tax basis reduction due to CITCs, which are recognized when assets are placed into service, and valuation allowances on deferred tax assets.

The 32.5% decrease in the tax rate from the six months ended June 30, 2013, to the six months ended June 30, 2014, is largely caused by the impact of changes in valuation allowances and the 50% basis reduction on the receipt of CITCs.

The effective tax rate decreased 32.5% for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 due to:

State income taxes
(2.5
)%
Change in valuation allowances(1)
(54.1
)%
50% basis reduction due to CITCs(1)
21.9
 %
Foreign rate differential and effect of flow-through(2)
1.5
 %
Other
0.7
 %
Total Change
(32.5
)%
____________________
(1)
The changes relating to CITCs and valuation allowances are primarily related to Genesis.
(2)
The Summerhaven and Conestogo project entities, as well as the Trillium entities, are Canadian limited partnerships, the partners of which are not predecessor entities and therefore not included in the predecessor financial statements.  Because of their flow through nature, no income taxes have been provided with regard to these entities.  Foreign rate differential is the difference in taxes calculated on Canadian income from Canadian projects (excluding flow through entities) at Canadian statutory rates compared to the U.S. statutory rate.


24


LIQUIDITY AND CAPITAL RESOURCES

NEP's business requires substantial capital to fund:

current O&M costs;
debt service payments;
distributions to holders of common units;
maintenance and expansion capital expenditures and other investments;
unforeseen events; and
other business expenses.

Prior to the completion of the Offering, NEP’s operations largely relied on, and will continue to largely rely on, internally generated cash flow.  NEP expects to satisfy its future capital requirements through a combination of cash on hand, cash flow from operations, borrowings under existing and anticipated future financing arrangements.  These sources of funds are expected to be adequate to provide for NEP's short-term and long-term liquidity and capital needs.  However, NEP is subject to business and operational risks that could adversely affect its cash flow.  A material decrease in cash flows would likely produce a corresponding adverse effect on NEP's borrowing capacity.

As a normal part of its business, depending on market conditions, NEP expects from time to time to consider opportunities to repay, redeem, repurchase or refinance its indebtedness.  In addition, NEP expects from time to time to consider potential investments in new acquisitions.  These events may cause NEP to seek additional debt or equity financing, which may not be available on acceptable terms or at all.  Debt financing, if available, could impose additional cash payment obligations, additional covenants and operating restrictions.

NEP OpCo has agreed to allow NEER or one of its affiliates to withdraw funds received by its subsidiaries, including NEP OpCo, and to hold those funds in accounts of NEER or one of its affiliates to the extent the funds are not required to pay project costs or otherwise required to be maintained by NEP's subsidiaries, until the financing agreements permit distributions to be made, or, in the case of NEP OpCo, until such funds are required to make distributions or to pay expenses or other operating costs.  If NEER fails to return withdrawn funds when required by NEP's subsidiaries’ financings, the lenders will be entitled to draw on credit support provided by NEER in the amount of such withdrawn funds.  In addition, NEP OpCo will have a claim for any funds that NEER fails to return:

when required by its subsidiaries’ financings;
when its subsidiaries’ financings otherwise permit distributions to be made to NEP OpCo;
when funds are required to be returned to NEP OpCo; or
when otherwise demanded by NEP OpCo.

If NEER or one of its affiliates realizes any earnings on the withdrawn funds prior to the return of such funds, it will be permitted to retain those earnings.  

Liquidity Position

At June 30, 2014 and December 31, 2013, NEP's liquidity position was approximately $143.3 million and $62.8 million, respectively.  The table below provides the components of NEP’s liquidity position as of June 30, 2014 and December 31, 2013:

 
June 30, 2014
 
December 31, 2013
 
(In thousands)
Cash and cash equivalents
$
107,095

 
$
26,580

Letter of credit facilities - Genesis
82,888

 
82,888

Less amounts outstanding
(46,663
)
 
(46,663
)
Total(1)
$
143,320

 
$
62,805

____________________
(1)
Excludes restricted cash of $346.4 million and $2.4 million at June 30, 2014 and December 31, 2013, respectively.  The restricted cash at June 30, 2014 includes CITC cash for use in mandatory debt repayments as required by the Genesis financing agreement.

Management believes that NEP's liquidity position and cash flows from operations will be adequate to finance O&M, capital expenditures, distributions to its unitholders and other liquidity commitments.  Management continues to regularly monitor NEP's financing needs consistent with prudent balance sheet management.


25


Financing Arrangements

Revolving Credit Facility

In connection with the Offering, on July 1, 2014, the Loan Parties entered into a $250 million revolving credit facility. For a discussion of the terms of the revolving credit facility, see Note 3 to NextEra Energy Partners, LP's balance sheet.

Project Financings

Projects in the initial portfolio are subject to project financings that contain certain financial covenants and distribution tests, including debt service coverage ratios.  In general, these project financings contain representations and warranties that are customary for these types of financings, including limitations on investments and restricted payments.  Generally, NEP's project financings accrue interest at a fixed interest rate.  However, two of NEP's project financings accrue interest at variable rates based on the LIBOR and one project accrues interest at a variable rate based upon the three-month CDOR.  Several interest rate swaps were entered into for two of these financings to hedge against interest rate movements with respect to interest payments on the loan.  Under the project financings, each project will be permitted to pay distributions out of available cash on a semi-annual basis so long as certain conditions are satisfied, including that reserves are funded with cash or credit support, no default or event of default under the applicable financings has occurred and is continuing at the time of such distribution or would result therefrom, and each project is otherwise in compliance with the project financing’s covenants and the applicable minimum debt service coverage ratio is satisfied.  The minimum debt service coverage ratio that must be satisfied under all of NEP's project financings is 1.20:1.00.  At June 30, 2014, NEP was in compliance with all covenants under its project financings and its debt service coverage ratios equaled or exceeded 1.20:1.00 in all periods subsequent to obtaining each financing.

Contractual Obligations

NEP's contractual obligations as of June 30, 2014 were as follows:

 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
 
(millions)
Contractual Obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, including interest(1)
$
403.6

 
$
173.0

 
$
176.1

 
$
174.6

 
$
161.5

 
$
2,268.8

 
$
3,357.6

Asset retirement activities(2)

 

 

 

 

 
88.1

 
88.1

Land lease payments(3)
1.9

 
3.9

 
4.0

 
4.0

 
4.1

 
116.9

 
134.8

Total
$
405.5

 
$
176.9

 
$
180.1

 
$
178.6

 
$
165.6

 
$
2,473.8

 
$
3,580.5

____________________
(1)
Includes principal, interest and interest rate swaps.  Variable rate interest was computed using June 30, 2014 rates.
(2)
Represents expected cash payments adjusted for inflation for estimated costs to perform asset retirement activities.
(3)
Represents various agreements that provide for payments to landowners for the right to use the land upon which the projects are located.

Capital Expenditures

Annual capital spending plans are developed based on projected requirements by the projects. Capital expenditures primarily represent the estimated cost of acquisitions or capital improvements, including construction expenditures that are expected to increase over the long-term, NEP OpCo’s operating income or operating capacity.  Capital expenditures for projects that have already commenced commercial operations are generally not significant because most expenditures relate to repairs and maintenance and are expensed when incurred.  For the six months ended June 30, 2014 and 2013, NEP had capital expenditures of approximately $135 million and $431 million, respectively.  At June 30, 2014, estimated capital expenditures for the remainder of 2014 and 2015 were $28 million, primarily for the completion of construction of the Bluewater facility to be funded by NEER, and $2 million, respectively.  There are no significant planned capital expenditures for 2016 through 2018.  These estimates are subject to continuing review and adjustment and actual capital expenditures may vary significantly from these estimates.

Cash Distributions to Unitholders

NEP's partnership agreement requires it to distribute available cash quarterly.  Generally, available cash is all cash on hand at the date of determination in respect of such quarter (including any expected distributions from NEP OpCo), less the amount of cash reserves established by NEP's general partner.  NEP currently expects that cash reserves would be established solely to provide for the payment of income taxes payable by NEP, if any.  Cash flow is generated from distributions NEP receives from NEP OpCo each quarter and, during the purchase price adjustment period, from NEE Equity, which payments will be funded solely by any distributions NEE Equity receives from NEP OpCo with respect to such quarter. Although NEP currently expects that cash reserves would be established solely to provide for the payment of any of NEP's income taxes as described above, NEP expects NEP OpCo to establish cash reserves prior to making distributions to NEP to pay costs and expenses of NEP's subsidiaries, in addition to NEP's expenses, as well as any debt service requirements and future capital expenditures. During the purchase price adjustment period, should NEP OpCo not make a quarterly distribution in an amount at least equal to the minimum quarterly distribution, the

26


purchase price will be reduced by the difference for such quarter and NEE Equity will pay NEP a purchase price adjustment equal to such shortfall, provided that NEE Equity will not be required to pay a purchase price adjustment in any quarter in excess of the distribution actually received by NEP OpCo.

NEP OpCo will distribute all of its available cash (as defined in NEP OpCo's partnership agreement) to its unitholders, including NEP, each quarter.  The majority of such available cash will be derived from the operations of the initial portfolio.  The cash available for distribution is likely to fluctuate from quarter to quarter, and in some cases significantly, as a result of the performance of the initial portfolio, seasonality, maintenance and outage schedules and other factors.

Cash Flows

Six Months Ended June 30, 2014, Compared to Six Months Ended June 30, 2013

The following table reflects the changes in cash flows for the comparative periods:

 
2014
 
2013
 
Change
Six Months Ended June 30,
(in millions)
Net cash provided by operating activities
$
84.6

 
$
42.5

 
$
42.1

Net cash used in investing activities
$
(127.9
)
 
$
(152.8
)
 
$
24.9

Net cash provided by financing activities
$
122.8

 
$
102.0

 
$
20.8


Net Cash Provided by Operating Activities

Changes in net cash provided by operating activities were driven by higher cash flows from projects that commenced commercial operations after June 2013.  These projects included Summerhaven, Genesis Unit 1 and Genesis Unit 2.

Net Cash Used in Investing Activities

Changes in net cash used in investing activities were driven by decreased capital expenditures related to construction activities and changes in restricted cash balances related to the timing of construction payments for projects that commenced commercial operations after June 30, 2013.  These projects included Summerhaven, Genesis Unit 1 and Genesis Unit 2.  In addition, during 2014, the proceeds received from CITCs related to Genesis have been restricted for use in mandatory debt repayment as required by the Genesis financing agreement.

 
2014
 
2013
Six Months Ended June 30,
(in millions)
Capital expenditures
$
(90.5
)
 
$
(364.2
)
Proceeds from CITCs
306.2

 

Changes in restricted cash
(344.0
)
 
207.3

Other
0.4

 
4.1

Net cash used in investing activities
$
(127.9
)
 
$
(152.8
)

Net Cash Provided by Financing Activities

Changes in net cash provided by financing activities were driven by higher net member contributions.

 
2014
 
2013
Six Months Ended June 30,
(in millions)
Member contributions – net
$
126.8

 
$
118.5

Issuances of long-term debt
14.7

 

Other
(18.7)

 
(16.5)

Net cash provided by financing activities
$
122.8

 
$
102.0


Critical Accounting Policies and Estimates

NEP's significant accounting policies are described in Note 2 to the unaudited condensed combined financial statements, which were prepared under generally accepted accounting principles.  Critical accounting policies are those that NEP believes are both

27


most important to its financial condition and results of operations, and require complex, subjective judgments, often as a result of the need to make estimates and assumptions about the effect of matters that are inherently uncertain.  Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions.  The following policies are those considered to be the most critical in understanding the judgments that are involved in preparing the condensed combined financial statements.

Income Taxes

The U.S. project entities presented in these financial statements were historically included in the consolidated federal income tax return of NEE.  Income taxes as presented herein attribute current and deferred income taxes to the U.S. project entities in a manner that is systematic, rational and consistent with the asset and liability method prescribed by Accounting Standards Codification Topic (ASC) 740, “Accounting for Income Taxes.”  Accordingly, the U.S. project entities’ income tax provisions are prepared under the separate return method.  The separate return method applies ASC 740 to the stand-alone financial statements of each member of the consolidated group as if the group member were a separate taxpayer and a stand-alone enterprise.  Accordingly, the sum of the amounts allocated to the U.S. project entities’ provisions may not equal the income taxes that would have resulted from a consolidated filing of these entities.

The Canadian project entities have not been included in the consolidated U.S. tax filing of NextEra, as they are excluded from the U.S. federal income tax group.  The Moore and Sombra project entities, as well as St. Clair and Varna (owner of Bluewater), were Canadian corporations that filed separate Canadian income tax returns and taxes have been provided herein on that basis.  The Summerhaven and Conestogo project entities, as well as the Trillium entities, are Canadian limited partnerships from which virtually all of the tax attributes flow through to the owner, a Canadian corporation, which is not a predecessor entity.  None of the income nor any tax attributes of the flow through entities flow through to a U.S. taxpayer and are not reflected in any U.S. tax return.  Because of their flow-through nature, no income taxes have been provided with regard to these entities.

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense.  In evaluating NEP's ability to recover its deferred tax assets individually by entity and by taxing jurisdiction, NEP considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations.  In projecting future taxable income, NEP begins with historical results and incorporates assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.  These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates NEP is using to manage the underlying businesses.  In evaluating the objective evidence that historical results provide, NEP generally considers three years of cumulative operating income (loss).

ASC 740 provides that a tax benefit from an uncertain tax position will be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.  ASC 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, and disclosure and transition.  There are no material uncertain tax positions recognized in the financial statements.

NEP recognizes tax liabilities in accordance with ASC 740 and adjusts these liabilities when its judgment changes as a result of the evaluation of new information not previously available.  Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from NEP's current estimate of the tax liabilities.  These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.

Impairment of Long-Lived Assets

NEP evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.

An impairment loss is required to be recognized if the carrying value of the asset exceeds the undiscounted future net cash flows associated with the asset.  The impairment loss to be recognized is the amount by which the carrying value of the long-lived asset exceeds the asset’s fair value.  In most instances, the fair value is determined by discounting estimated future cash flows using an appropriate interest rate.

The amount of future net cash flows, the timing of such cash flows and the determination of an appropriate interest rate all involve estimates and judgments about future events.  In particular, the aggregate amount of cash flows determines whether an impairment exists, and the timing of the cash flows is critical in determining fair value for the purposes of determining the impairment loss to be recognized.  Because each assessment is based on the facts and circumstances associated with each long-lived asset, the effects of changes in assumptions cannot be generalized.

Quantitative and Qualitative Disclosures about Market Risk

NEP is exposed to several market risks in its normal business activities.  Market risk is the potential loss that may result from market changes associated with its business.  The types of market risks include interest rate and counterparty credit risks.

28



Interest Rate Risk

NEP is exposed to risk resulting from changes in interest rates associated with current and future issuances of debt.  The debt of some of its subsidiaries accrues interest at fixed rates and the debt of some of its other subsidiaries accrues interest at variable rates.  NEP manages interest rate exposure by monitoring current interest rates, entering into interest rate swap contracts and using a combination of fixed rate and variable rate debt. Interest rate swaps are used to mitigate or adjust interest rate exposure when appropriate based upon market conditions or when required by financing agreements. 

NEP has long-term debt instruments that subject us to the risk of loss associated with movements in market interest rates.  As of June 30, 2014, less than 10% of the long-term debt, including current maturities, was exposed to such risk as the balance was either financially hedged or comprised of fixed rate debt.  As of June 30, 2014, the estimated fair value of NEP's debt was approximately $2.4 billion and the carrying value of the debt was $2.2 billion.  NEP estimates that a 0.1% decrease in market interest rates would have increased the fair value of its long-term debt by $18 million as of June 30, 2014.

Counterparty Credit Risk

Risks surrounding counterparty performance and credit risk could ultimately impact the amount and timing of expected cash flows.  Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties under the terms of their contractual obligations.  NEP intends to monitor and manage credit risk through credit policies that include a credit approval process and the use of credit mitigation measures such as prepayment arrangements in certain circumstances.  NEP also seeks to mitigate counterparty risk by having a diversified portfolio of counterparties.  In addition, the projects in NEP's initial portfolio are fully contracted to creditworthy counterparties with a capacity-weighted average Moody’s Investor Service, Inc. credit rating of A2 under long-term contracts that will have a capacity-weighted average remaining contract term of approximately 21 years as of June 30, 2014, after giving effect to the Bluewater FIT Contract.


29


Item 3.  Quantitative and Qualitative Disclosures About Market Risk

See Management's Discussion - Quantitative and Qualitative Disclosures About Market Risk.


Item 4.  Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of June 30, 2014, NEP had performed an evaluation, under the supervision and with the participation of its management, including the chief executive officer and chief financial officer of NEP GP, the general partner of NEP, of the effectiveness of the design and operation of NEP's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)).  Based upon that evaluation, the chief executive officer and the chief financial officer of NEP GP concluded that NEP's disclosure controls and procedures were effective as of June 30, 2014.

(b) Changes in Internal Control Over Financial Reporting

This report does not include management's assessment regarding changes in internal control over financial reporting due to a transition period established by rules of the SEC for newly public companies.


PART II - OTHER INFORMATION

Item 1A.  Risk Factors

Limited partner interests are inherently different from shares of capital stock of a corporation, although many of the business risks to which NEP is subject are similar to those that would be faced by a corporation engaged in similar businesses and NEP will be treated as a corporation for U.S. federal income tax purposes.  If any of the following risks were to occur, NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders could be materially and adversely affected.  In that case, it may not be able to pay distributions to its unitholders, the trading price of its common units could decline and investors could lose all or part of their investment in NEP.

Operational Risks

NEP has a limited operating history and its projects may not perform as expected.

The projects in NEP's initial portfolio are relatively new with all projects having commenced operations within the past five years.  In addition, NEP expects that many of the projects that it may acquire, including the NEER ROFO Projects, will not have commenced operations, will have recently commenced operations or otherwise will have a limited operating history.  As a result, the assumptions and estimates regarding the performance of these projects are and will be made without the benefit of a meaningful operating history, which may impair NEP's ability to accurately estimate its results of operations, financial condition and liquidity.  The ability of NEP's projects to perform as expected will also be subject to risks inherent in newly constructed energy projects, including equipment performance below NEP's expectations, system failures and outages.  The failure of some or all of the projects to perform as expected could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

NEP's ability to make cash distributions to its unitholders will be affected by wind and solar conditions at its projects.

The amount of energy that a wind project can produce depends on wind speeds, air density, weather and equipment, among other factors.  If wind speeds are too low, NEP's wind projects may not perform as expected or may not be able to generate energy at all and, if wind speeds are too high, the wind projects may have to shut down to avoid damage.  As a result, the output from NEP's wind projects can vary greatly as local wind speeds and other conditions vary.  Similarly, the amount of energy that a solar project is able to produce depends on several factors, including the amount of solar energy that reaches its solar panels.  Wind project or solar panel placement, interference from nearby wind projects or other structures and the effects of vegetation, snow, ice, land use and terrain also affect the amount of energy that NEP's wind and solar projects generate. If wind, solar, meteorological, topographical or other conditions at NEP's wind or solar projects are less conducive to energy production than its calculations based on historical conditions and its projections suggest, NEP's projects may not produce the amount of energy expected.  The failure of some or all of NEP's projects to perform according to NEP's expectations could have a material adverse effect on its business, financial condition, results of operations and ability to make cash distributions to its unitholders.


30


Operation and maintenance of energy projects involve significant risks that could result in unplanned power outages or reduced output.

There are risks associated with the operation of NEP's projects.  These risks include:

breakdown or failure of turbines, blades, solar panels, mirrors and other equipment;
catastrophic events, such as fires, earthquakes, severe weather, tornadoes, ice or hail storms or other meteorological conditions, landslides and other similar events beyond NEP's control, which could severely damage or destroy a project, reduce its energy output or result in personal injury or loss of life;
technical performance below expected levels, including the failure of wind turbines, solar panels, mirrors and other equipment to produce energy as expected due to incorrect measures of expected performance provided by equipment suppliers;
increases in the cost of operating the projects, including costs relating to labor, equipment, insurance and real estate taxes;
operator or contractor error or failure to perform;
serial design or manufacturing defects, which may not be covered by warranty;
extended events, including force majeure, under certain PPAs, RESOP Contracts and FIT Contracts that may give rise to a termination right of the customer under such a PPA, FIT Contract or RESOP Contract (Energy Sale Counterparty);
failure to comply with permits and the inability to renew or replace permits that have expired or terminated;
the inability to operate within limitations that may be imposed by current or future governmental permits;
replacements for failed equipment, which may need to meet new interconnection standards or require system impact studies and compliance that may be difficult or expensive to achieve;
land use, environmental or other regulatory requirements;
disputes with the BLM, other owners of land on which NEP's projects are located or adjacent landowners;
changes in law, including changes in governmental permit requirements;
government or utility exercise of eminent domain power or similar events; and
existence of liens, encumbrances and other imperfections in title affecting real estate interests.

These and other factors could require NEP to shut down its wind or solar projects.  These factors could also degrade equipment, reduce the useful life of interconnection and transmission facilities and materially increase maintenance and other costs.  Unanticipated capital expenditures associated with maintaining or repairing NEP's projects may reduce profitability.

In addition, replacement and spare parts for solar panels, wind turbines and other key equipment may be difficult or costly to acquire or may be unavailable.  For example, the projects in NEP's initial portfolio do not always hold spare substation main transformers and, if any of these projects had to replace any of such transformers, they would be unable to sell energy until replacement equipment was installed.  Each solar and wind project requires a specific transformer design and, if it does not have an acceptable spare available, it may need to order a replacement.  Order lead times can be lengthy, potentially reaching up to one year.

Any of the operational risks described above could significantly decrease or eliminate the revenues of a project, significantly increase its operating costs, cause a default under NEP's financing agreements or give rise to damages or penalties owed by NEP to an Energy Sale Counterparty, another contractual counterparty, a governmental authority or other third parties or cause defaults under related contracts or permits.  Any of these events could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

Some of NEP's projects’ and some of NEER's ROFO Projects' wind turbines are not generating the amount of energy estimated by their manufacturers’ original power curves, and the manufacturers may not be able to restore energy capacity at the affected turbines.

Wind turbine generators for NEP's projects representing approximately 167 MW of nameplate generating capacity are not generating the amount of energy they should be according to the turbine manufacturer’s original power curves.  NEP expects that the turbine manufacturer will undertake a combination of modifications to improve the electricity generation to within the manufacturers' guaranteed levels with respect to approximately 107 MW of the affected turbines.  Because of regulatory issues, NEP does not expect that the energy generation with respect to the approximately 60 MW of remaining affected turbines will be able to be restored to within guaranteed levels, although NEP expects some incremental improvements.

In addition, NEP believes that the wind turbine generators of certain NEER ROFO Projects totaling approximately 568 MW of nameplate capacity are not generating the amount of energy they should be according to the turbine manufacturer’s original power curves.  NEP expects that the turbine manufacturer will undertake a combination of modifications to improve the energy generation to within guaranteed levels with respect to approximately 162 MW of these affected turbines but that only incremental improvements will be made with respect to the remaining affected turbines due to regulatory issues.  The financial analysis for each of the affected projects and the affected NEER ROFO Projects utilizes a revised power curve that reflects expected performance and not the original power curve.

Although NEP's projections assume that these efforts will restore the energy generation of the affected turbines as described above, there is no assurance that the proposed efforts will restore the energy generation as expected, if at all, or that these or other turbines

31


will not experience additional energy generation deficiencies.  The occurrence of any of these events could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

Initially, NEP will depend on certain of the projects in its initial portfolio for a substantial portion of its anticipated cash flows.

Initially, NEP will depend on certain of the projects in its initial portfolio for a substantial portion of its anticipated cash flows.  For example, NEP expects its largest project, Genesis, to account for between approximately 20% and 25% of the net generation of its initial portfolio and between approximately 40% and 45% of its EBITDA for the twelve-month period ending June 30, 2015.  NEP may not be able to successfully execute NEP's acquisition strategy in order to further diversify NEP's sources of cash flow and reduce NEP's portfolio concentration.  Consequently, the impairment or loss of any one or more of the projects in NEP's initial portfolio, such as Genesis, could materially and disproportionately reduce its total energy generation and cash flows and, as a result, have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

Terrorist or similar attacks could impact NEP's projects or surrounding areas and adversely affect its business.

Terrorists have attacked energy assets such as substations and related infrastructure in the past and may attack them in the future.  Any attacks on NEP's projects or the facilities of third parties on which its projects rely could severely damage such projects, disrupt business operations, result in loss of service to customers and require significant time and expense to repair.  Additionally, energy-related facilities, such as substations and related infrastructure, are protected by limited security measures, in most cases only perimeter fencing.  Cyber-attacks, including those targeting information systems or electronic control systems used to operate the energy projects and the facilities of third parties on which NEP's projects rely could severely disrupt business operations, result in loss of service to customers and significant expense to repair security breaches or system damage.  NEP's initial portfolio, as well as projects it may acquire and the facilities of third parties on which NEP's projects rely, may be targets of terrorist acts and affected by responses to terrorist acts, each of which could fully or partially disrupt NEP's projects’ ability to produce, transmit, transport and distribute energy.  To the extent such acts equate to a force majeure event under NEP's PPAs and FIT Contracts, the Energy Sale Counterparty may terminate such PPAs or FIT Contracts if such force majeure event continues for a period ranging from 12 months to 36 months as specified in the applicable agreement.  A terrorist act or similar attack could significantly decrease revenues or result in significant reconstruction or remediation costs, any of which could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

NEP's energy production may be substantially below its expectations if a natural disaster or meteorological conditions damage its turbines, solar panels, other equipment or facilities.

A natural disaster or other meteorological conditions could damage or require NEP to shut down its turbines, solar panels, other equipment or facilities, impeding NEP's ability to maintain and operate its projects, decreasing its energy production levels and revenues.  To the extent these conditions equate to a force majeure event under NEP's PPAs and FIT Contracts, the Energy Sale Counterparty may terminate such PPAs or FIT Contracts if the force majeure event continues for a period ranging from 12 months to 36 months as specified in the applicable agreement.  These conditions could also damage or reduce the useful life of interconnection and transmission facilities of third parties relied upon by NEP's projects and increase maintenance costs.  For example, Genesis is located in an area of California that has experienced substantial seismic activity, the reoccurrence of which could cause significant physical damage to Genesis’ facilities and the surrounding energy transmission infrastructure.  Replacement and spare parts for solar panels, wind turbines and key pieces of equipment may be difficult or costly to acquire or may be unavailable.  In certain instances, NEP's projects would be unable to sell energy until a replacement part is installed.  If NEP experiences a prolonged interruption at one of its projects, energy production could decrease.  Production of less energy than expected due to these or other conditions could reduce NEP's revenues, which could have a material adverse effect on its business, financial condition, results of operations and ability to make cash distributions to its unitholders.

NEP is not able to insure against all potential risks and it may become subject to higher insurance premiums.

NEP is exposed to numerous risks inherent in the operation of wind and solar projects, including equipment failure, manufacturing defects, natural disasters, terrorist attacks, sabotage, vandalism and environmental risks.  The occurrence of any one of these events may result in NEP being named as a defendant in lawsuits asserting claims for substantial damages, including environmental cleanup costs, personal injury, property damage, fines and penalties.  Further, with respect to Bluewater and any future acquisitions of any projects that are under construction or development, NEP is, or will be, exposed to risks inherent in the construction of these projects.

NEP shares insurance coverage with NEE and its affiliates, for which NEP will reimburse NEE under various agreements. NEE currently maintains liability insurance coverage for itself and its affiliates, including NEP, which covers legal and contractual liabilities arising out of bodily injury, personal injury or property damage, including resulting loss of use, to third parties.  Additionally, NEE also maintains coverage for itself and its affiliates, including NEP, for physical damage to assets and resulting business interruption, including damage caused by terrorist acts committed by a U.S. person or interest.  However, such policies do not cover all potential losses and coverage is not always available in the insurance market on commercially reasonable terms.  To the extent NEE or any

32


of its affiliates experiences covered losses under the insurance policies, the limit of NEP's coverage for potential losses may be decreased.

NEE may also reduce or eliminate such coverage at any time.  NEP may not be able to maintain or obtain insurance of the type and amount NEP desires at reasonable rates and NEP may elect to self-insure a portion of its portfolio.  The insurance coverage NEP does obtain may contain large deductibles or fail to cover certain risks or all potential losses.  In addition, NEP's insurance policies are subject to annual review by its insurers and may not be renewed on similar or favorable terms, including coverage, deductibles or premiums, or at all.  If a significant accident or event occurs for which NEP is not fully insured, it could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

Warranties provided by the suppliers of equipment for NEP's projects may be limited by the ability of a supplier to satisfy its warranty obligations or by the expiration of applicable time or liability limits, which could reduce or void the warranty protections, or the warranties may be insufficient to compensate NEP's losses.

NEP expects to benefit from various warranties, including product quality and performance warranties, provided by suppliers in connection with the purchase of equipment necessary to operate its projects.  NEP's suppliers may fail to fulfill their warranty obligations.  For example, the supplier of solar reflector panels for Genesis, Flabeg Solar US Corp., filed for Chapter 7 bankruptcy on April 2, 2013, and may not be able to perform under its warranty.  Even if a supplier fulfills its obligations, the warranty may not be sufficient to compensate NEP for all of its losses.  In addition, these warranties generally expire within two to five years after the date each equipment item is delivered or commissioned and are subject to liability limits.  If installation is delayed, NEP may lose all or a portion of the benefit of a warranty.  If NEP seeks warranty protection and a supplier is unable or unwilling to perform its warranty obligations, whether as a result of its financial condition or otherwise, or if the term of the warranty has expired or a liability limit has been reached, there may be a reduction or loss of warranty protection for the affected equipment, which could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

Supplier concentration at certain of NEP's projects may expose it to significant credit or performance risks.

NEP often relies on a single supplier or a small number of suppliers to provide equipment, technology and other services required to operate its projects.  If any of these suppliers cannot perform under their agreements with NEP, NEP may need to seek alternative suppliers.  Alternative suppliers, products and services may not perform similarly and replacement agreements may not be available on favorable terms or at all.  NEP may be required to make significant capital contributions to remove, replace or redesign equipment that cannot be supported or maintained by replacement suppliers.  A number of factors, including the credit quality of NEP's suppliers, may impact their ability to perform under NEP's supply agreements.  The failure of any supplier to fulfill its contractual obligations to NEP could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

NEP relies on interconnection and transmission facilities of third parties to deliver energy from its projects, and if these facilities become unavailable, NEP's projects may not be able to operate or deliver energy.

NEP depends on interconnection and transmission facilities owned and operated by third parties to deliver the energy from its projects.  In addition, some of the projects in NEP's initial portfolio share essential facilities, including interconnection and transmission facilities, with other projects that are owned by NEE and its affiliates.  Many of the interconnection and transmission arrangements for the projects in NEP's initial portfolio are governed by separate agreements with the owners of the transmission or distribution system.  Congestion, emergencies, maintenance, outages, overloads, requests by other parties for transmission service, actions or omissions by other projects with which NEP shares facilities and other events beyond NEP's control could partially or completely curtail deliveries of energy by its projects and increase project costs.  For example, Southern California Edison recently requested approval from the California Public Utilities Commission to upgrade four transmission circuits over a 36 to 48 month time period beginning in 2016, which may limit the ability of Genesis to deliver its full output capability into the electric grid during that time period.  In addition, any termination of a project’s interconnection or transmission arrangements or non-compliance by an interconnection provider, the owner of shared facilities or another third party with its obligations under an interconnection or transmission arrangement may delay or prevent NEP's projects from delivering energy to its energy sale counterparties or into Ontario's Independent Electricity System Operator (IESO)-managed system, as applicable.  If the interconnection or transmission arrangement for a project is terminated, NEP may not be able to replace it on similar terms to the existing arrangement, or at all, or NEP may experience significant delays or costs in connection with such replacement.  Moreover, if NEP acquires any projects that are under construction or development, a failure or delay in the construction or development of interconnection or transmission facilities could delay the completion of the project.  The unavailability of interconnection, transmission or shared facilities could adversely affect the operation of its projects and the revenues received, which could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

NEP's business is subject to liabilities and operating restrictions arising from environmental, health and safety laws and regulations.

NEP's projects are subject to numerous environmental, health and safety laws, regulations, guidelines, policies, directives and other requirements governing or relating to, among other things:

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the protection of wildlife, including migratory birds, bats and threatened and endangered species, such as desert tortoises, or protected species such as eagles, and other protected plants or animals whose presence or movements often cannot be anticipated or controlled;
controlled or uncontrolled air emissions, including greenhouse gases;
water use, and discharges of process materials or pollutants into surface waters;
the storage, handling, use, transportation and distribution of hazardous or toxic substances and other regulated substances, materials, and/or chemicals;
releases of hazardous materials into the environment and the prevention of and responses to releases of hazardous materials into soil and groundwater;
federal, state, provincial or local land use, zoning, building and transportation laws and requirements, which may mandate conformance with sound levels, radar and communications interference, hazards to aviation or navigation, or other potential nuisances such as the flickering effect caused when rotating wind turbine blades periodically cast shadows through openings such as the windows of neighboring properties, which is known as shadow flicker;
the presence or discovery of archaeological, religious or cultural resources at or near NEP's operations; and
the protection of workers’ health and safety.

If NEP's projects do not comply with such laws, regulations or requirements, NEP may be required to pay penalties or fines, or curtail or cease operations of the affected projects.  Violations of environmental and other laws, regulations and permit requirements, including certain violations of laws protecting wetlands, migratory birds, bald and golden eagles and threatened or endangered species, may also result in criminal sanctions or injunctions.

NEP's projects also carry inherent environmental, health and safety risks, including the potential for related civil litigation, regulatory compliance, remediation orders, fines and other penalties.  For instance, NEP's projects could malfunction or experience other unplanned events that cause spills or emissions that exceed permitted levels, resulting in personal injury, fines or property damage.

Additionally, NEP may be held liable for related investigatory and cleanup costs, which are typically not limited by law or regulation, for any property where there has been a release or potential release of a hazardous substance, regardless of whether NEP knew of or caused the release or potential release.  NEP could also be liable for other costs, including fines, personal injury or property damage or damage to natural resources.  In addition, some environmental laws place a lien on a contaminated site in favor of the government as security for damages and costs it may incur for contamination and cleanup.  Contained or uncontained hazardous substances on, under or near NEP's projects, regardless of whether it owns or leases the sited property, or the inability to remove or otherwise remediate such substances may restrict or eliminate NEP's ability to operate its projects.

Each of NEP's projects are designed specifically for the landscape of the project site and each covers a large area.  As such, archaeological discoveries could occur at its projects at any time.  Such discoveries could result in the restriction or elimination of NEP's ability to operate its business at any project.  Landscape-scale projects and operations may cause impacts to certain landscape views, trails, or traditional cultural activities.  Such impacts may trigger claims from citizens that a NEP project and/or its operations are infringing upon their legal rights or other claims, resulting in the restriction or elimination of NEP's ability to operate its business at the affected project.

Environmental, health and safety laws and regulations have generally become more stringent over time, and NEP expects this trend to continue.  Significant capital and operating costs may be incurred at any time to keep NEP's projects in compliance with environmental, health and safety laws and regulations.  If it is not economical to make those expenditures, or if NEP violates any of these laws and regulations, it may be necessary to retire projects or restrict or modify its operations, which could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

NEP's projects may be adversely affected by legislative changes or a failure to comply with applicable energy regulations.

NEP's project entities and energy sale counterparties are subject to regulation by U.S. and Canadian federal, state, provincial and local authorities.  The wholesale sale of electric energy in the continental U.S. states, other than portions of Texas, is subject to the jurisdiction of the FERC and the ability of a U.S. project entity to charge the negotiated rates contained in its PPA is subject to that project entity’s maintenance of its general authorization from the FERC to sell electricity at market-based rates.  The FERC may revoke a U.S. project entity’s market-based rate authorization if it determines that the U.S. project entity can exercise market power in transmission or generation, create barriers to entry or has engaged in abusive affiliate transactions.  The negotiated rates entered into under the U.S. project entities’ PPAs could be changed by the FERC if it determined such change is in the public interest.  While this threshold public interest determination would require extraordinary circumstances under the FERC precedent, if the FERC decreases the prices paid to NEP for energy delivered under any of its PPAs, its revenues could be below its projections and its business, financial condition, results of operations and ability to make cash distributions to its unitholders could be materially adversely affected.

The renewable energy industry in Ontario is subject to provincial government regulation.  A change in government could result in a provincial government that is not supportive of renewable energy projects.  Changing political priorities or a change in government in Ontario could affect the ability of the Ontario Power Authority (OPA) to perform its obligations under NEP's FIT Contracts and RESOP Contracts or could result in the cancellation of its FIT Contracts or RESOP Contracts.  The provincial government may fail

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to pass legislation to preserve sufficient funds for payments to various Ontario projects, including NEP's, which could have a material adverse effect on its business, financial condition, results of operations and ability to make cash distributions to its unitholders.

NEP's project entities, with the exceptions of Conestogo, Sombra and Moore, are subject to the mandatory reliability standards of the North American Electric Reliability Corporation (NERC).  The NERC reliability standards are a series of requirements that relate to maintaining the reliability of the North American bulk electric system and cover a wide variety of topics including physical and cybersecurity of critical assets, information protocols, frequency response and voltage standards, testing, documentation and outage management.  If NEP fails to comply with these standards, NEP could be subject to sanctions, including substantial monetary penalties.  Although NEP's U.S. project entities are not subject to state utility rate regulation because they sell energy exclusively on a wholesale basis, NEP is subject to other state regulations that may affect NEP's projects’ sale of energy and operations.  Changes in state regulatory treatment are unpredictable and could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

The structure of the industry and regulation in the U.S. and Canada is currently, and may continue to be, subject to challenges and restructuring proposals.  Additional regulatory approvals may be required due to changes in law or for other reasons.  NEP expects the laws and regulation applicable to its business and the energy industry generally to be in a state of transition for the foreseeable future.  Changes in such laws and regulations could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

As a result of the FPA and the FERC’s regulations of transfers of control over public utilities, an investor could be required to obtain the FERC approval to acquire common units that would give the investor and its affiliates indirect ownership of 10% or more in NEP's U.S. project entities.

NEP's U.S. project entities are public utilities as defined in the FPA.  Any transfer of direct or indirect control over them requires pre-approval by the FERC under FPA Section 203, either under existing blanket authorizations or by application.  A violation of FPA Section 203 by NEP as the seller, or an investor as the purchaser of NEP's voting securities, could subject the party in violation to civil or criminal penalties under the FPA, including civil penalties of up to $1 million per day per violation and other possible sanctions imposed by the FERC under the FPA.  The FERC generally presumes that a direct or indirect holder of 10% or more of a public utility’s voting securities controls the public utility.

NEP has submitted an application to the FERC requesting an order under FPA Section 203 or a declaratory order determining that NEP's common units are passive, non-voting securities that will not allow any unitholders to exercise control over its public utility subsidiaries.  Unless and until the FERC grants NEP's application, NEP will include restrictions in its partnership agreement under which an investor and its affiliates that acquire 10% or more of its outstanding limited partnership interests will lose their voting rights.  If the FERC grants NEP's application, the 10% restriction will no longer apply.  However, under NEP's partnership agreement, upon the approval by the FERC of NEP's application, an investor and its affiliates that acquire 20% or more of its outstanding limited partnership interests will lose their voting rights.

NEP does not own all of the land on which the projects in its initial portfolio are located and its use and enjoyment of the property may be adversely affected to the extent that there are any lienholders or leaseholders that have rights that are superior to NEP's rights.

NEP does not own all of the land on which the projects in its initial portfolio are located and they generally are, and its future projects may be, located on land occupied under long-term easements, leases and rights of way.  The ownership interests in the land subject to these easements, leases and rights of way may be subject to mortgages securing loans or other liens and other easement, lease rights and rights of way of third parties that were created prior to NEP's projects’ easements, leases and rights of way.  As a result, some of NEP's projects’ rights under such easements, leases or rights of way may be subject to the rights of these third parties.  While NEP performs title searches, obtains title insurance, records its interests in the real property records of the projects’ localities and enters into non-disturbance agreements to protect itself against these risks, such measures may be inadequate to protect against all risk that NEP's rights to use the land on which its projects are or will be located and its projects’ rights to such easements, leases and rights of way could be lost or curtailed.  Any such loss or curtailment of NEP's rights to use the land on which its projects are or will be located could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders. 

NEP is subject to risks associated with litigation or administrative proceedings that could materially impact its operations, including future proceedings related to projects it subsequently acquires.

NEP is subject to risks and costs, including potential negative publicity, associated with lawsuits or claims contesting the operation or, if it acquires a project that has not reached the commercial operation date (COD) at the time of the acquisition, construction of its projects.  The result and costs of defending any such lawsuit, regardless of the merits and eventual outcome, may be material.  For example, individuals and interest groups may sue to challenge the issuance of a permit for a project or seek to enjoin a project’s operations.  NEP may also become subject to claims based on alleged negative health effects related to acoustics, shadow flicker or other claims associated with wind turbines from individuals who live near NEP's projects.  Any such legal proceedings or disputes could materially increase the costs associated with NEP's operations.  In addition, NEP may subsequently become subject to legal proceedings or claims contesting the construction or operation of NEP's projects.  Any such legal proceedings or disputes could

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materially delay NEP's ability to complete construction of a project in a timely manner or at all or materially increase the costs associated with commencing or continuing a project’s commercial operations.  Settlement of claims and unfavorable outcomes or developments relating to these proceedings or disputes, such as judgments for monetary damages, injunctions or denial or revocation of permits, could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

The Summerhaven, Conestogo and Bluewater projects are subject to Canadian domestic content requirements under their FIT Contracts.

The FIT Contracts relating to Summerhaven, Conestogo and Bluewater require suppliers to source a minimum percentage of their equipment and services from Ontario resident suppliers to meet the minimum required domestic content level (MRDCL).  The MRDCL for Summerhaven and Conestogo is 25% and the MRDCL for Bluewater is 50%.  Following their respective CODs, Summerhaven and Conestogo submitted reports to the OPA summarizing how they achieved the MRDCL for their respective projects (Domestic Content Reports) and the OPA issued letters to Summerhaven and Conestogo acknowledging the completeness of their Domestic Content Reports. Bluewater is not expected to achieve COD until the third quarter of 2014 and, accordingly, has not yet submitted a Domestic Content Report to the OPA.  The OPA may not deem the Bluewater Domestic Content Report complete as required under the terms of the Bluewater FIT Contract and may request additional information from Bluewater and supporting documentation related to the activities that Bluewater undertook in order to meet its MRDCL.  Following the issuance by the OPA of letters acknowledging the completeness of the Domestic Content Reports for Summerhaven, Conestogo and Bluewater, the OPA will have the right to audit these projects for a period of up to 7 years post-COD to confirm that they complied with the domestic content requirements under their respective FIT Contracts and achieved their respective MRDCLs.  The failure by any of these projects to achieve its MRDCL could result in a default by such project under its FIT Contract, which default may not be possible to cure and could result in a termination of its FIT Contract, without compensation, by the OPA.  A termination of the FIT Contract for Summerhaven, Conestogo or Bluewater could negatively affect revenues generated by such project and have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

NEP's cross-border operations require NEP to comply with anti-corruption laws and regulations of the U.S. government and non-U.S. jurisdictions.

Doing business in the U.S. and Canada requires NEP to comply with anti-corruption laws and regulations of the U.S. and Canadian governments.  NEP's failure to comply with these laws and regulations may expose NEP to liabilities.  These laws and regulations may apply to NEP, NEE and its affiliates and its individual directors, officers, employees and agents and may restrict NEP's operations, trade practices, investment decisions and partnering activities.  In particular, NEP's Canadian operations are subject to U.S. laws and regulations, such as the Foreign Corrupt Practices Act of 1977 (FCPA), as well as Canadian anti-corruption laws.  The FCPA prohibits U.S. companies and their officers, directors, employees and agents acting on their behalf from offering, promising, authorizing or providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise securing an improper advantage.  The FCPA also requires companies to make and keep books, records and accounts that accurately and fairly reflect transactions and dispositions of assets and to maintain a system of adequate internal accounting controls.  As part of NEP's business, it deals with foreign officials for purposes of the FCPA.  As a result, business dealings between NEP's employees and any such foreign official could expose NEP to the risk of violating anti-corruption laws even if such business practices may be customary or are not otherwise prohibited between NEP and a private third party.  Violations of these legal requirements are punishable by criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts as well as other remedial measures.  NEP has established policies and procedures designed to assist it and personnel acting on its behalf in complying with applicable U.S. and Canadian laws and regulations; however, these policies and procedures may not be effective and any such violation of these legal requirements, inadvertent or otherwise, could have a material adverse effect on its business, financial condition, results of operations and ability to make cash distributions to its unitholders.

NEP is subject to risks associated with its ownership or acquisition of projects that remain under construction, which could result in its inability to complete construction projects on time or at all, and make projects too expensive to complete or cause the return on an investment to be less than expected.

As part of its acquisition strategy, NEP may choose to acquire other projects that have not yet commenced operations and remain under construction.  There may be delays or unexpected developments in completing any future construction projects, which could cause the construction costs of these projects to exceed NEP's expectations, result in substantial delays or prevent the project from commencing commercial operations.  Various factors could contribute to construction-cost overruns, construction halts or delays or failure to commence commercial operations, including:

delays in obtaining, or the inability to obtain, necessary permits and licenses;
delays and increased costs related to the interconnection of new projects to the transmission system;
the inability to acquire or maintain land use and access rights;
the failure to receive contracted third-party services;
interruptions to dispatch at the projects;
supply interruptions;
work stoppages;

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labor disputes;
weather interferences;
unforeseen engineering, environmental and geological problems, including discoveries of contamination, protected plant or animal species or habitat, archaeological or cultural resources or other environment-related factors;
unanticipated cost overruns in excess of budgeted contingencies; and
failure of contracting parties to perform under contracts.

In addition, where NEP has a relationship with a third party to complete construction of any construction project, NEP is subject to the viability and performance of the third party.  NEP's inability to find a replacement contracting party, where the original contracting party has failed to perform, could result in the abandonment of the construction of such project, while it could remain obligated under other agreements associated with the project, including offtake power sales agreements.

Any of these risks could cause NEP's financial returns on these investments to be lower than expected or otherwise delay or prevent the completion of such projects or distribution of cash to NEP, or could cause NEP to operate below expected capacity or availability levels, which could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

Contract Risks

NEP relies on a limited number of Energy Sale Counterparties and NEP is exposed to the risk that they are unwilling or unable to fulfill their contractual obligations to NEP or that they otherwise terminate their agreements with NEP.

In most instances, NEP sells the energy generated by each of its projects to a single Energy Sale Counterparty under a long-term PPA, RESOP Contract or FIT Contract or into the IESO-managed system subject to a FIT Contract with a single Energy Sale Counterparty.  NEP expects that these contracts will be the primary, and possibly the exclusive, source of cash flows available to make distributions to its unitholders.  Thus, the actions of even one Energy Sale Counterparty may cause variability of NEP's overall revenue, profitability and cash flows that are difficult to predict.  Similarly, significant portions of its credit risk may be concentrated among a limited number of Energy Sale Counterparties and the failure of even one of these key customers to pay its obligations to NEP could significantly impact NEP's business and financial results.  NEP expects its largest Energy Sale Counterparties, which are PG&E and the OPA, to account for an aggregate of between approximately 45% and 50% of the net generation of its initial portfolio and an aggregate of between approximately 75% and 80% of its EBITDA for the twelve-month period ending June 30, 2015.  Any or all of NEP's Energy Sale Counterparties may fail to fulfill their obligations under their PPAs, RESOP Contracts or FIT Contracts or with NEP, whether as a result of the occurrence of any of the following factors or otherwise:

Specified events beyond NEP's control or the control of an Energy Sale Counterparty may temporarily or permanently excuse the Energy Sale Counterparty from its obligation to accept and pay for delivery of energy generated by a project.  These events could include a system emergency, transmission failure or curtailment, adverse weather conditions or labor disputes.
Since a governmental entity makes payments with respect to the energy produced by some of NEP's projects under FIT Contracts and RESOP Contracts, NEP is subject to the risk that the governmental entity may unilaterally change or terminate its contract with NEP, whether as a result of legislative, regulatory, political or other activities.
The ability of NEP's Energy Sale Counterparties to fulfill their contractual obligations to NEP depends on their creditworthiness.  NEP is exposed to the credit risk of its Energy Sale Counterparties over an extended period of time due to the long-term nature of NEP's PPAs, RESOP Contracts or FIT Contracts with them.  These customers could become subject to insolvency or liquidation proceedings or otherwise suffer a deterioration of their creditworthiness when they have not yet paid for energy delivered, any of which could result in underpayment or nonpayment under such agreements.
A default or failure by NEP to satisfy minimum energy delivery requirements or in mechanical availability levels under NEP's PPAs could result in damage payments to the applicable Energy Sale Counterparty or termination of the applicable PPA.

If NEP's Energy Sale Counterparties are unwilling or unable to fulfill their contractual obligations to NEP, or if they otherwise terminate such agreements prior to their expiration, NEP may not be able to recover contractual payments and commitments due to NEP.  Since the number of customers that purchase wholesale bulk energy is limited, NEP may be unable to find a new energy purchaser on similar or otherwise acceptable terms or at all.  In some cases, there currently is no economical alternative counterparty to the original Energy Sale Counterparty.  For example, if the OPA fails to make payments as required by its FIT Contracts with NEP's Ontario projects, these projects would receive only wholesale spot prices for output sold into the IESO-managed system, which could result in a reduction of cash flows and impact NEP's ability to cover operational or financing costs for such projects.  The loss of or a reduction in sales to any of NEP's Energy Sale Counterparties could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

NEP may not be able to extend, renew or replace expiring or terminated agreements, such as its PPAs, RESOP Contracts and Canadian FIT Contracts, at favorable rates or on a long-term basis.

As of June 30, 2014, after giving effect to the Bluewater FIT Contract, the capacity weighted average remaining contract life under NEP's PPAs, FIT Contracts and RESOP Contracts will be approximately 21 years.  NEP's ability to extend, renew or replace its

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existing PPAs, RESOP Contracts and FIT Contracts depends on a number of factors beyond its control, including:

whether the Energy Sale Counterparty has a continued need for energy at the time of expiration, which could be affected by, among other things, the presence or absence of governmental incentives or mandates, prevailing market prices, and the availability of other energy sources;
the satisfactory performance of NEP's delivery obligations under such PPAs, RESOP Contracts or FIT Contracts;
the regulatory environment applicable to NEP's Energy Sale Counterparties at the time;
macroeconomic factors present at the time, such as population, business trends and related energy demand; and
the effects of regulation on the contracting practices of NEP's Energy Sale Counterparties.

If NEP is not able to extend, renew or replace on acceptable terms existing PPAs, RESOP Contracts or FIT Contracts before contract expiration, or if such agreements are otherwise terminated in accordance with their terms prior to their expiration, NEP may be forced to sell the energy on an uncontracted basis at prevailing market prices, which could be materially lower than NEP received under the applicable contract.  Alternatively, if there is no market for a project’s uncontracted energy, NEP may be required to decommission the project before the end of its useful life.  Any failure to extend or replace a significant portion of NEP's existing PPAs, RESOP Contracts or FIT Contracts, or extending, renewing or replacing them at lower prices or with other unfavorable terms or the decommissioning of a project could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

If the energy production by or availability of NEP's U.S. projects is less than expected, they may not be able to satisfy minimum production or availability obligations under NEP's U.S. project entities’ PPAs.

NEP's energy production or its projects’ availability could be less than historically has been the case or less than projected due to various factors, including unexpected wind or solar conditions, natural disasters, equipment underperformance, operational issues, changes in law or actions taken by third parties.  NEP's U.S. project entities’ existing PPAs contain provisions that require NEP to produce a minimum amount of energy or be available a minimum percentage of time over periods of time specified in the PPAs.  A failure to produce sufficient energy or to be sufficiently available to meet NEP's commitments under its PPAs could result in the payment of damages or the termination of PPAs and could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

Risks Related to NEP's Acquisition Strategy and Future Growth

NEP's growth strategy depends on locating and acquiring interests in additional projects consistent with its business strategy at favorable prices.

NEP intends to pursue opportunities to acquire contracted clean energy projects that are either operational or, in limited circumstances, construction-ready or under development, from NEER and others consistent with its business strategy.  Various factors could affect the availability of such projects to grow NEP's business, including the following factors and those described in more detail in the additional risk factors below:

competing bids for a project, including the NEER ROFO Projects, from companies that may have substantially greater purchasing power, capital or other resources or a greater willingness to accept lower returns or more risk than NEP does;
fewer acquisition opportunities than NEP expects, which could result from, among other things, available projects having less desirable economic returns or higher risk profiles than NEP believes suitable for its acquisition strategy and future growth;
NEER’s failure to complete the development of the NEER ROFO Projects or other projects that have not yet commenced commercial operations, which could result from, among other things, failure to obtain or comply with permits, failure to procure the requisite financing or interconnection or failure to satisfy the conditions to the project agreements or any of the other projects in its development pipeline, in a timely manner or at all;
NEP's failure to successfully develop and finance projects, to the extent that it decides to acquire projects that are not yet operational or to otherwise pursue development activities with respect to new projects;
NEP's inability to obtain the necessary consents to consummate the acquisition; and
the presence or potential presence of:
pollution, contamination or other wastes at the project site;
protected plant or animal species;
archaeological or cultural resources;
wind waking or solar shadowing effects caused by neighboring activities, which reduce potential energy production by decreasing wind speeds or reducing available insolation;
land use restrictions and other environment-related siting factors;
growing local opposition to wind and solar projects in certain markets due to concerns about noise, health, environmental or other alleged impacts of wind or solar projects; and
slower industry growth than indicated in the third party sources upon which NEP's industry growth estimates are based.


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Any of these factors could limit NEP's acquisition opportunities and prevent it from executing its growth strategy and making cash distributions to its unitholders.  In addition, antidumping cases have been filed at the U.S. Department of Commerce that seek to impose duties on solar cells manufactured in Taiwan that are incorporated in solar panels imported into the U.S. by Chinese companies.  If these cases are successful, the price of solar panels could increase which may make development of solar projects less competitive and adversely impact NEP's ability to acquire solar projects in the future.

Further, even if NEP consummates acquisitions that it believes will be accretive to cash available for distribution per common unit, those acquisitions may decrease the cash available for distribution as a result of incorrect assumptions in NEP's evaluation of such acquisitions, unforeseen consequences or other external events beyond its control.

Any failure to locate and acquire interest in additional, contracted clean energy projects at favorable prices could have a material adverse effect on NEP's ability to grow its business and make cash distributions to its unitholders.

NEP OpCo’s partnership agreement requires that it distribute its available cash, which could limit its ability to grow and make acquisitions.

NEP expects that NEP OpCo will distribute its available cash (as defined in NEP OpCo’s partnership agreement) to its unitholders, including NEP, and will rely primarily upon external financing sources, including commercial borrowings and the issuance of debt and equity securities, to fund acquisitions and expansion capital expenditures.  The incurrence of additional commercial borrowings or other debt to finance NEP's growth strategy would result in increased interest expense, which in turn could have a material adverse effect on its ability to grow its business and make cash distributions to its unitholders.  To the extent NEP or NEP OpCo issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that NEP will be unable to maintain or increase its per unit distribution level.  There are no limitations in NEP's or NEP OpCo’s partnership agreements or in NEP OpCo’s revolving credit facility, on its or NEP OpCo’s ability to issue additional units, including units ranking senior to NEP's or NEP OpCo’s common units.  In addition, because NEP OpCo intends to distribute its available cash, NEP's growth may not be as fast as that of businesses which reinvest their available cash to expand ongoing operations.  As a result, to the extent NEP OpCo is unable to finance growth externally or external financing significantly increases interest expense or results in the issuance of additional units, NEP's cash distribution policy will significantly impair its ability to grow and increase its distributions to NEP.

Lower prices for other fuel sources reduce the demand for wind and solar energy.

The amount of wind and solar energy demand is affected by the price and availability of other fuels, including nuclear, coal, natural gas and oil, as well as other sources of renewable energy.  For example, low natural gas prices have led, in some instances, to increased natural gas consumption in lieu of other energy sources.  To the extent renewable energy, particularly wind and solar energy, becomes less cost-competitive due to reduced government targets and incentives that favor renewable energy, cheaper alternatives or otherwise, demand for wind and solar energy and other forms of renewable energy could decrease.  Slow growth or a long-term reduction in the energy demand could have a material adverse effect on NEP's ability to grow its business and make cash distributions to its unitholders.

Government regulations providing incentives and subsidies for clean energy could change at any time and such changes may negatively impact NEP's growth strategy.

NEP's strategy to grow its business through the acquisition of clean energy projects partly depends on current government policies that promote and support clean energy and enhance the economic viability of owning clean energy projects.  Clean energy projects currently benefit from various U.S. federal, state and local governmental incentives, such as PTCs, ITCs, CITCs, loan guarantees, RPS, the U.S. federal Modified Accelerated Cost-Recovery System for depreciation and other incentives, as well as similar Canadian incentives, RPS, accelerated cost recovery deductions and other commercially oriented incentives.  These policies have had a significant impact on the development of clean energy and they could change at any time.  These incentives make the development of clean energy projects more competitive by providing tax credits or grants and accelerated depreciation for a portion of the development costs, decreasing the costs associated with developing such projects or creating demand for renewable energy assets through RPS programs.  A loss or reduction in such incentives could decrease the attractiveness of clean energy projects to developers, including NEE, which could reduce NEP's acquisition opportunities.  Such a loss or reduction could also reduce NEP's willingness to pursue or develop certain clean energy projects due to higher operating costs or lower PPAs, RESOP Contracts and FIT Contracts.

If these policies are not renewed, the market for future clean energy PPAs or FIT Contracts may be smaller and the prices for future clean energy PPAs or FIT Contracts may be lower.  For example, the U.S. Internal Revenue Code of 1986, as amended (Code) provides a PTC on a ¢/kWh basis for all qualifying energy produced by a qualifying U.S. wind project during the first ten years after it commences commercial operations.  The PTC is no longer available for new wind projects unless they were “under construction” by the end of 2013 and the developer uses continuous efforts towards commencing commercial operations.  Under IRS guidance, projects that were under construction by the end of 2013 and have commenced commercial operations by the end of 2015 will be deemed to have used continuous efforts.  The ITC and CITC are U.S. federal incentives that provide an income tax credit or cash grant after the project commences commercial operations of up to 30% of eligible installed costs.  An owner of a project that meets the requirements of the applicable incentive has the option to choose which of the foregoing incentives to pursue.  A solar project

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must commence commercial operations on or before December 31, 2016, to qualify for the 30% ITC.  A solar project that commences commercial operations after December 31, 2016, may qualify for an ITC equal to 10% of eligible installed costs.  Alternatively, in order to qualify for the CITC, a solar project must have begun construction by the end of 2011 and have commenced commercial operations on or before December 31, 2016.  To the extent that these policies are changed in a manner that reduces the incentives that benefit NEP's projects, they could generate reduced revenues and reduced economic returns, experience increased financing costs and encounter difficulty obtaining financing.

Additionally, some states with RPS targets have met, or in the near future will meet, their renewable energy targets.  For example, California, which has one of the most aggressive RPS in the U.S., is poised to meet its current target of 25% renewable energy generation by 2016 and has the potential to meet its goal of 33% renewable power generation by 2020 with already-proposed new renewable energy projects.  Ontario anticipates meeting its non-hydro renewable energy target of 10.7 GW by 2025.  If, as a result of achieving these targets, these and other U.S. states and Canadian provinces do not increase their targets in the near future, demand for additional renewable energy could decrease.  To the extent other states and provinces adopt RPS targets, programs or goals, demand for renewable energy could decrease in the future.  Any of the foregoing could have a material adverse effect on NEP's business, financial condition, results of operations and ability to grow its business and make cash distributions to its unitholders.

NEP's growth strategy depends on the acquisition of projects developed by NEE and third parties, which face risks related to project siting, financing, construction, permitting, the environment, governmental approvals and the negotiation of project development agreements.

Project development is a capital intensive business that relies heavily on the availability of debt and equity financing sources to fund projected construction and other capital expenditures.  As a result, in order to successfully develop a project, development companies, including NEE and its subsidiaries, must obtain sufficient financing to complete the development phase of their projects.  Any significant disruption in the credit and capital markets or a significant increase in interest rates could make it difficult for development companies to raise funds when needed to secure construction financing, which would limit a project’s ability to obtain financing to complete the construction of a project NEP may seek to acquire.

Project developers, including NEE, develop, construct, manage, own and operate clean energy and transmission facilities.  A key component of their businesses is their ability to construct and operate generation and transmission facilities to meet customer needs.  As part of these activities, project developers must periodically apply for licenses and permits from various regulatory authorities and abide by their respective conditions and requirements.  If project developers, including NEE, are unsuccessful in obtaining necessary licenses or permits on acceptable terms or encounter delays in obtaining or renewing such licenses or permits, or if regulatory authorities initiate any associated investigations or enforcement actions or impose penalties or reject projects, the potential number of projects that may be available for NEP to acquire may be reduced or potential transaction opportunities may be delayed.

If the challenges of developing projects increase for project developers, including NEE, NEP's pool of available opportunities may be limited, which could have a material adverse effect on NEP's ability to grow its business and make cash distributions to its unitholders.

NEP's ability to effectively consummate future acquisitions will also depend on its ability to arrange the required or desired financing for acquisitions.

NEP may not have sufficient availability under NEP OpCo's credit facilities or have access to project-level financing on commercially reasonable terms when acquisition opportunities arise.  An inability to obtain the required or desired financing could significantly limit NEP's ability to consummate future acquisitions and effectuate its growth strategy.  If financing is available, it may be available only on terms that could significantly increase NEP's interest expense, impose additional or more restrictive covenants and reduce cash available for distribution.  Similarly, the issuance of additional equity securities as consideration for acquisitions could cause significant unitholder dilution and reduce the cash available for distribution per unit if the acquisitions are not sufficiently accretive.  NEP's inability to effectively consummate future acquisitions could have a material adverse effect on NEP's ability to grow its business and make cash distributions to its unitholders.

Acquisitions of existing clean energy projects involve numerous risks.

NEP's strategy includes growing its business through the acquisition of existing clean energy projects.  The acquisition of existing clean energy projects involves numerous risks, including exposure to existing liabilities and unanticipated post-acquisition costs associated with the pre-acquisition activities by the project, difficulty in integrating the acquired projects into NEP's business and, if the projects are in new markets, the risks of entering markets where NEP has limited experience.  Additionally, NEP risks overpaying for such projects (or not making acquisitions on an accretive basis) and failing to retain the customers of such projects. While NEP will perform due diligence on prospective acquisitions, NEP may not discover all potential risks, operational issues or other issues in such projects.  Further, the integration and consolidation of acquisitions require substantial human, financial and other resources and, ultimately, NEP's acquisitions may divert NEP's management’s attention from its existing business concerns, disrupt its ongoing business or not be successfully integrated.  Future acquisitions might not perform as expected or the returns from such acquisitions might not support the financing utilized to acquire them or maintain them.  A failure to achieve the financial returns NEP expects

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when NEP acquires clean energy projects could have a material adverse effect on NEP's ability to grow its business and make cash distributions to its unitholders.

Renewable energy procurement is subject to U.S. state and Canadian provincial regulations, with relatively irregular, infrequent and often competitive procurement windows.

With few material federal policies driving the growth of renewable energy, each U.S. state and Canadian province has its own renewable energy regulations and policies.  Renewable energy developers must anticipate the future policy direction in each state and province and secure viable projects before they can bid to procure a PPA or FIT Contract or other contract through often highly competitive auctions.  In particular, energy policy in the key market of Ontario is subject to a political process with respect to its FIT Program and renewable energy procurements that may change dramatically as a result of changes in the provincial or political climate.  A failure to anticipate accurately the future policy direction in a jurisdiction or to secure viable projects could have a material adverse effect on NEP's ability to grow its business and make cash distributions to its unitholders.

While NEP currently owns only wind and solar projects, NEP may acquire other sources of clean energy, including natural gas and nuclear projects, and may expand to include other types of assets including transmission projects, and any future acquisition of non-renewable energy projects, including transmission projects, may present unforeseen challenges and result in a competitive disadvantage relative to NEP's more-established competitors.

NEP may acquire other sources of clean energy, including contracted natural gas and nuclear projects, and other types of projects, including transmission projects.  NEP may be unable to identify attractive non- renewable energy or transmission acquisition opportunities or acquire such projects at a price and on terms that are attractive.  In addition, the consummation of such acquisitions could expose NEP to increased operating costs, unforeseen liabilities or risks including regulatory and environmental issues associated with entering new sectors of the energy industry, including requiring a disproportionate amount of NEP's management’s attention and resources, which could have an adverse impact on NEP's business and place NEP at a competitive disadvantage relative to more established non-renewable energy market participants.  A failure to successfully integrate such acquisitions with NEP's then-existing projects as a result of unforeseen operational difficulties or otherwise, could have a material adverse effect on NEP's business, financial condition, results of operations and ability to grow its business and make cash distributions to its unitholders.

NEP faces substantial competition primarily from developers, IPPs, pension and private equity funds for opportunities in North America.

NEP believes its primary competitors for opportunities in North America are developers, IPPs, pension and private equity funds.  NEP also competes for personnel with requisite industry knowledge and experience.  Furthermore, the industry has experienced and may experience volatile demand for wind turbines, solar panels and related components.  If demand for this equipment increases, suppliers may give priority to other market participants, including NEP's competitors, who may have greater resources than NEP does.  An inability to effectively compete with developers, IPPs, pension and private equity funds for opportunities in North America could have a material adverse effect on NEP's ability to grow its business and make cash distributions to its unitholders.

Risks Related to NEP's Financial Activities

Restrictions in NEP OpCo's subsidiaries' revolving credit facility could adversely affect NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

The direct subsidiaries of NEP OpCo have entered into a $250 million revolving credit facility.  This credit facility contains various covenants and restrictive provisions that will limit NEP OpCo’s ability to, among other things:

incur or guarantee additional debt;
make distributions on or redeem or repurchase common units;
make certain investments and acquisitions;
incur certain liens or permit them to exist;
enter into certain types of transactions with affiliates;
merge or consolidate with another company; and
transfer, sell or otherwise dispose of projects.

The credit facility also will contain covenants requiring NEP OpCo to maintain certain financial ratios, including as a condition to making cash distributions to NEP and its other unitholders.  NEP OpCo’s ability to meet those financial ratios and tests can be affected by events beyond NEP's control, and it may be unable to meet those ratios and tests and therefore may be unable to make cash distributions to its unitholders including NEP.  As a result, NEP may be unable to make distributions to its unitholders.  In addition, the credit facility contains events of default customary for transactions of that nature, including the occurrence of a change of control.

The provisions of the credit facility may affect NEP's ability to obtain future financing and pursue attractive business opportunities and NEP's flexibility in planning for, and reacting to, changes in business conditions.  A failure to comply with the provisions of the credit facility could result in an event of default, which could enable the lenders to declare, subject to the terms and conditions of

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the credit facility, any outstanding principal of that debt, together with accrued and unpaid interest, to be immediately due and payable and entitle lenders to enforce their security interest.  If the payment of the debt is accelerated, the revenue from the projects may be insufficient to repay such debt in full, lenders could enforce their security interest and NEP's unitholders could experience a partial or total loss of their investment.  

NEP's cash available for distribution to its unitholders may be reduced as a result of restrictions on NEP's subsidiaries’ cash distributions to NEP under the terms of their indebtedness.

NEP and NEP OpCo intend to pay quarterly cash distributions on all of their respective outstanding common units.  However, in any period, NEP's and NEP OpCo’s ability to pay cash distributions to its respective unitholders will depend on the performance of NEP's subsidiaries as well as all of the other factors.  The ability of NEP's subsidiaries to make distributions to NEP and NEP OpCo may be restricted by, among other things, the provisions of existing and future indebtedness.

The agreements governing NEP's subsidiaries’ project-level debt contain financial tests and covenants that NEP's subsidiaries must satisfy prior to making distributions and restrict the subsidiaries from making more than one distribution per quarter or per six-month period.  If any of NEP's subsidiaries is unable to satisfy these restrictions or is otherwise in default under such agreements, it would be prohibited from making distributions that could, in turn, affect the amount of cash distributed by NEP OpCo, and ultimately limit NEP's ability to pay cash distributions to its unitholders.  Additionally, such agreements require NEP's projects to establish a number of reserves out of their revenues, including reserves to service NEP's debt and reserves for O&M expenses, which have already been funded.  These cash reserves will affect the amount of cash distributed by NEP OpCo, which ultimately will affect the amount of cash available for distribution to its unitholders.  Also, upon the occurrence of certain events, including NEP's subsidiaries’ inability to satisfy distribution conditions for an extended period of time, NEP's subsidiaries’ revenues may be swept into one or more accounts for the benefit of the lenders under the subsidiaries’ debt agreements and the subsidiaries may be required to prepay indebtedness.  Restrictions preventing NEP's subsidiaries’ cash distributions could have a material adverse effect on NEP's business, financial condition, results of operations and ability to make cash distributions to its unitholders.

NEP's subsidiaries’ substantial amount of indebtedness may adversely affect NEP's ability to operate its business and its failure to comply with the terms of its subsidiaries' indebtedness could have a material adverse effect on NEP's financial condition.

NEP's subsidiaries’ substantial indebtedness could have important consequences.  For example,

failure to comply with the covenants in the agreements governing these obligations could result in an event of default under those agreements, which could be difficult to cure, result in bankruptcy or, with respect to subsidiary debt, result in loss of NEP OpCo's ownership interest in one or more of its subsidiaries or in some or all of their assets as a result of foreclosure;
NEP's subsidiaries’ debt service obligations require them to dedicate a substantial portion of their cash flow to pay principal and interest on their debt, thereby reducing their cash available to execute NEP's business plan and make cash distributions to its unitholders;
NEP's subsidiaries’ substantial indebtedness could limit NEP's ability to fund operations of any projects acquired in the future and NEP's financial flexibility, which could reduce its ability to plan for and react to unexpected opportunities;
NEP's subsidiaries’ substantial debt service obligations make NEP vulnerable to adverse changes in general economic, credit markets, capital markets, industry, competitive conditions and government regulation that could place NEP at a disadvantage compared to competitors with less debt; and
NEP's subsidiaries’ substantial indebtedness could limit NEP's ability to obtain financing for working capital including collateral postings, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes.

If NEP's subsidiaries, including NEP OpCo, do not comply with their obligations under their debt instruments, they may be required to refinance all or a part of their indebtedness, which they may not be able to do on similar terms or at all.  Increases in interest rates and changes in debt covenants may reduce the amounts that NEP and its subsidiaries can borrow, reduce NEP's cash flows and increase the equity investment NEP may be required to make in any projects NEP may acquire.  In addition, the project-level financing for projects that NEP may acquire that are under construction may prohibit distributions until such project commences operations.  If NEP's subsidiaries are not able to generate sufficient operating cash flow to repay their outstanding indebtedness or otherwise are unable to comply with the terms of their indebtedness, NEP could be required to reduce overhead costs, reduce the scope of its projects, sell some or all of its projects or delay construction of projects NEP may acquire, all of which could have a material adverse effect on its business, financial condition, results of operations and ability to make cash distributions to its unitholders.

Currency exchange rate fluctuations may affect NEP's operations.

NEP is exposed to currency exchange rate fluctuations to the extent the cash flows generated by NEP's projects are in multiple currencies.  For example, 36% of NEP's revenue for the year ended December 31, 2013, was denominated in Canadian dollars and NEP expects net revenue from Canadian dollar markets to continue to represent a meaningful portion of its net revenue.  Any measures that NEP may implement to reduce the effect of currency exchange rate fluctuations and other risks of its multinational operations may not be effective or may be overly expensive.  In addition, foreign currency translation risk arises upon the translation

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of the financial statements of NEP's subsidiaries whose functional currency is the Canadian dollar into U.S. dollars for the purpose of preparing NEP's condensed combined financial statements included elsewhere in this report.  The assets and liabilities of its Canadian dollar denominated subsidiaries are translated at the closing rate at the date of reporting and income statement items are translated at the average rate for the period.  These currency translation differences may have significant negative impacts.  Foreign currency transaction risk also arises when NEP or its subsidiaries enter into transactions where the settlement occurs in a currency other than the functional currency of NEE or its subsidiaries.  Exchange differences arising from the settlement or translation of monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements are recognized as profit or loss in the period in which they arise, which could materially impact NEP's net income.

To the extent that NEP engages in hedging activities to reduce its currency exchange rate exposure, NEP may be prevented from realizing the full benefits of exchange rate increases above the level of the hedges.  However, because NEP is not fully hedged, NEP will continue to have exposure on the unhedged portion of the currency NEP exchanges.

Additionally, NEP's hedging activities may not be as effective as it anticipates in reducing the volatility of its future cash flows.  NEP's hedging activities can result in substantial losses if hedging arrangements are imperfect or ineffective or its hedging policies and procedures are not followed properly or do not work as intended.  Further, hedging contracts are subject to the credit risk that the other party may prove unable or unwilling to perform its obligations under the contracts, particularly during periods of weak and volatile economic conditions.  Certain of the financial instruments NEP uses to hedge its exchange rate exposure must be accounted for on a mark-to-market basis.  This causes periodic earnings volatility due to fluctuations in exchange rates.  Any exposure to adverse currency exchange rate fluctuations could materially and adversely affect NEP's financial condition, results of operations and cash flows and its ability to make cash distributions to its unitholders.

NEP is exposed to risks inherent in its use of interest rate swaps.

Some of NEP's subsidiaries’ indebtedness accrues interest at variable rates, and some of its subsidiaries have used interest rate swaps to try to protect against market volatility.  The use of interest rate swaps, however, does not eliminate the possibility of fluctuations in the value of the position or prevent losses if the value of the position declines.  Such transactions may also limit the opportunity for gain if the value of a position increases.  In addition, to the extent that actively quoted market prices and pricing information from external sources are not available, the valuation of these contracts will involve judgment or the use of estimates.  As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts.  If the values of these financial contracts change in a manner that NEP does not anticipate, or if a counterparty fails to perform under a contract, it could materially adversely affect its business, financial condition, results of operations and ability to make cash distributions to its unitholders.

Risks Related to NEP's Relationship with NEE

NEE will exercise substantial influence over NEP and NEP is highly dependent on NEE and its affiliates.

NEE indirectly owns NEP GP and has the ability to appoint all of the executive officers and directors of its general partner.  In addition, NEE, through NEE Equity, holds 79.9% of the common units of NEP OpCo.  As a result, NEE will continue to have a substantial influence on NEP's affairs and has majority voting power on certain matters requiring the approval of NEP's unitholders that do not exclude votes of NEE and its affiliates.  This concentration of ownership may delay or prevent a change in control of NEP, which could p