S-1 1 d876955ds1.htm FORM S-1 Form S-1
Table of Contents
Index to Financial Statements

As filed with the Securities and Exchange Commission on March 10, 2015

Registration No. 333-            

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

8point3 Energy Partners LP

(Exact Name of Registrant as Specified in its Charter)

 

Delaware 4911 47-3298142

(State or other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification Number)

77 Rio Robles

San Jose, California 95134

(408) 240-5500

(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

Charles D. Boynton

77 Rio Robles

San Jose, California 95134

(408) 240-5500

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

Copies to:

 

Joshua Davidson

Gerald M. Spedale

Baker Botts L.L.P.

One Shell Plaza

910 Louisiana Street

Houston, Texas 77002

(713) 229-1234

 

Andrea L. Nicolas

Lance T. Brasher

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, New York 10036

(212) 735-3000

 

T. Mark Kelly

E. Ramey Layne

Vinson & Elkins L.L.P.

1001 Fannin, Suite 2500

Houston, Texas 77002

(713) 758-2222

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨

   Accelerated filer  ¨    Non-accelerated filer  x    Smaller reporting company  ¨
      (Do not check if a smaller reporting company)   

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered

Proposed Maximum
Aggregate Offering

Price(1)(2)

Amount of

Registration Fee

Class A shares representing limited partner interests

$50,000,000.00 $5,810.00

 

(1) Includes the offering price of Class A shares issuable upon exercise of the underwriters’ option to purchase additional Class A shares.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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Index to Financial Statements

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED MARCH 10, 2015

PRELIMINARY PROSPECTUS

 

8point3 Energy Partners LP

                 Class A Shares

Representing Limited Partner Interests

 

 

This is the initial public offering of Class A shares representing limited partner interests of 8point3 Energy Partners LP. We are selling            Class A shares.

We expect the initial public offering price to be between $            and $            per Class A share. Currently, no public market exists for the Class A shares. We intend to list our Class A shares on the NASDAQ Global Market under the symbol “    .”

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act and we are eligible for reduced public company reporting requirements. Please read “Prospectus Summary—Implications of Being an Emerging Growth Company.”

Even though we are organized as a limited partnership under state law, we will be treated as a corporation for U.S. federal income tax purposes. Accordingly, we will be subject to U.S. federal income tax at regular corporate rates on our net taxable income and distributions we make to holders of our Class A shares will be taxable as ordinary dividend income to the extent of our current and accumulated earnings and profits as computed for U.S. federal income tax purposes.

 

 

Investing in the Class A shares involves risks that are described in the “Risk Factors” section beginning on page 33 of this prospectus.

These risks include the following:

 

    We may not have sufficient cash available for distribution to pay the initial quarterly distribution to our Class A shareholders.

 

    Since a substantial portion of our Initial Portfolio is still under construction, we are subject to risk until such projects achieve their respective commercial operation dates.

 

    We have a limited operating history and our projects may not perform as we expect.

 

    We may not be successful in implementing our growth strategy of making accretive acquisitions of additional solar energy projects.

 

    Our level of indebtedness or restrictions in the new credit facilities of 8point3 Operating Company, LLC could adversely affect our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

 

    Our general partner and its affiliates, including our Sponsors, have conflicts of interest with us and limited duties to us and our Class A shareholders, and they may favor their own interests to the detriment of us and our Class A shareholders.

 

    Holders of our Class A shares have limited voting rights and are not entitled to elect our general partner or its directors.

 

    Our partnership agreement restricts the remedies available to holders of our Class A shares for actions taken by our general partner that might otherwise constitute breaches of fiduciary duties.

 

    Class A shareholders will experience immediate and substantial dilution in as adjusted net tangible book value of $        per Class A share.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     Per Class A Share      Total  

Initial public offering price

   $                    $                

Underwriting discount(1)

   $                    $                

Proceeds to us (before expenses)

   $                    $                

 

(1) Excludes an aggregate structuring fee equal to     % of the gross proceeds of this offering payable to Goldman, Sachs & Co. and Citigroup Global Markets Inc. Please read “Underwriting.”

We have granted the underwriters an option to purchase up to an additional             Class A shares from us, at the initial public offering price, less the underwriting discount and structuring fee, for 30 days after the date of this prospectus.

The underwriters expect to deliver the Class A shares on or about                     , 2015.

 

 

 

Goldman, Sachs & Co.   Citigroup

 

 

The date of this prospectus is                    , 2015.


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Index to Financial Statements

TABLE OF CONTENTS

 

MARKET AND INDUSTRY DATA

  v   

CERTAIN TERMS USED IN THIS PROSPECTUS

  vi   

FORWARD-LOOKING STATEMENTS

  ix   

PROSPECTUS SUMMARY

  1   

Overview

  1   

Our Portfolio

  4   

Our Business Strategies

  7   

Competitive Strengths

  8   

Our Sponsors

  10   

Our Sponsors’ Joint Venture

  12   

Implications of Being an Emerging Growth Company

  13   

Risk Factors

  13   

Formation Transactions

  15   

Organizational Structure After the Formation Transactions

  18   

Management

  19   

Summary of Conflicts of Interests and Duties

  19   

Principal Executive Offices and Internet Address

  20   

The Offering

  21   

Summary Historical and Pro Forma Financial Data

  29   

Non-U.S. GAAP Financial Measures

  31   

RISK FACTORS

  33   

Risks Related to Our Business

  33   

Risks Related to Our Acquisition Strategy and Future Growth

  43   

Risks Related to Regulations

  51   

Risks Related to Our Project Agreements

  53   

Risks Related to Our Financial Activities

  55   

Risks Related to Our Relationship with Our Sponsors

  57   

Risks Related to this Offering and Ownership of Our Class A Shares

  61   

Risks Related to Taxation

  71   

USE OF PROCEEDS

  73   

CAPITALIZATION

  74   

DILUTION

  75   

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

  77   

General

  77   

Our Initial Quarterly Distribution

  80   

Minimum Quarterly Distribution of OpCo

  81   

Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 28, 2014

  82   

Estimated Cash Available for Distribution for the Twelve-Month Periods Ending August 31, 2016 and August 31, 2017

  84   

Estimated Cash Available for Distribution

  86   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT AND THE OPCO LIMITED LIABILITY COMPANY AGREEMENT RELATING TO CASH DISTRIBUTIONS

  87   

Provisions of Our Partnership Agreement Relating to Cash Distributions

  87   

Provisions of the OpCo Limited Liability Company Agreement Relating to Cash Distributions

  88   

Incentive Distribution Rights

  95   

Holdings’ Right to Reset Incentive Distribution Levels

  96   

Distributions from Capital Surplus

  99   

Distributions of Cash Upon Liquidation

  100   

SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

  103   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  105   

Overview

  105   

Items Affecting the Comparability of Our Financial Results

  107   

Significant Factors and Trends Affecting Our Business

  108   

Results of Operations—Predecessor

  110   

Combined Results of Operations of First Solar Project Entities

  114   

Liquidity and Capital Resources

  117   

Off-Balance-Sheet Arrangements

  119   

Critical Accounting Policies and Estimates

  119   

Quantitative and Qualitative Disclosures About Market Risks

  124   

INDUSTRY

  125   

Solar Energy Industry

  125   

Solar Energy Sectors

  125   

Key Drivers of Solar Energy Industry Growth

  125   

Solar Energy Markets

  129   

BUSINESS

  133   

Overview

  133   

Our Portfolio

  134   

Our Business Strategies

  137   

Competitive Strengths

  138   

Our Sponsors

  140   

Our Sponsors’ Joint Venture

  141   

Our Initial Portfolio

  141   

Regulatory Matters

  152   

Seasonality

  153   

Competition

  153   

Customers

  153   

Environmental Matters

  153   

Capital Investment

  155   

Employees

  156   

Properties

  156   

Insurance

  156   

Safety and Maintenance

  156   

Legal Proceedings

  156   

MANAGEMENT

  157   

Management of 8point3 Partners

  157   

Directors and Executive Officers of Our General Partner

  158   

Board Leadership Structure

  159   

Director Independence

  160   

Board Role in Risk Oversight

  160   

Committees of the Board of Directors

  160   

Executive Compensation

  161   

Compensation of Directors

  162   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  163   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

  164   

O&M Agreements

  164   

Asset Management Agreements

  168   

Performance and Limited Warranties

  170   

Shared Facilities Agreement

  175   

Maryland Solar Lease Arrangement

  175   

 

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Management Services Agreements

  176   

Omnibus Agreement

  180   

ROFO Agreements

  182   

Exchange Agreement

  183   

Registration Rights Agreement

  183   

Equity Purchase Agreement

  183   

Master Formation Agreement

  183   

Limited Liability Company Agreement of Holdings

  184   

Procedures for Review, Approval and Ratification of Related-Person Transactions

  187   

CONFLICTS OF INTEREST AND DUTIES

  188   

Conflicts of Interest

  188   

Duties of Our General Partner

  194   

DESCRIPTION OF THE SHARES

  199   

Class A Shares and Class B Shares

  199   

Transfer Agent and Registrar

  199   

Transfer of Class A Shares and Class B Shares

  199   

MATERIAL PROVISIONS OF THE 8POINT3 PARTNERS PARTNERSHIP AGREEMENT

  201   

Organization and Duration

  201   

Purpose

  201   

Capital Contributions

  201   

Meetings; Voting Rights

  201   

Class B Shares

  203   

Applicable Law; Forum, Venue and Jurisdiction

  203   

Limited Liability

  204   

Issuance of Additional Partnership Interests

  205   

Amendment of the Partnership Agreement

  205   

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

  207   

Termination and Dissolution

  208   

Liquidation and Distribution of Proceeds

  208   

Withdrawal or Removal of the General Partner

  209   

Transfer of General Partner Interest

  209   

Transfer of Ownership Interests in the General Partner

  209   

Change of Management Provisions

  209   

Limited Call Right

  210   

Status as Limited Partner

  210   

Indemnification

  210   

Reimbursement of Expenses

  211   

Books and Reports

  211   

Right to Inspect Our Books and Records

  211   

MATERIAL PROVISIONS OF THE OPCO LIMITED LIABILITY COMPANY AGREEMENT

  212   

Organization and Duration

  212   

Purpose

  212   

Capital Contributions

  212   

Meetings; Voting Rights

  212   

Applicable Law; Forum, Venue and Jurisdiction

  213   

Issuance of Additional Membership Interests

  214   

Transfer of OpCo Common Units

  214   

Amendment of the OpCo Limited Liability Company Agreement

  214   

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

  217   

Termination and Dissolution

  217   

Liquidation and Distribution of Proceeds

  218   

Withdrawal or Removal of the Managing Member

  218   

 

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Transfer of Managing Member Interests

  219   

Transfer of Ownership Interests in the Managing Member

  219   

Transfer of Incentive Distribution Rights

  219   

Status as Non-Managing Member

  219   

Indemnification

  219   

Reimbursement of Expenses

  220   

Books and Reports

  220   

SHARES ELIGIBLE FOR FUTURE SALE

  221   

Rule 144

  221   

Our Partnership Agreement

  221   

Registration Rights Agreement

  222   

Lock-Up Agreements

  222   

CERTAIN U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS

  223   

Distributions

  224   

Gain on Disposition of Class A Shares

  225   

Information Reporting and Backup Withholding

  225   

Taxation of Class A Shares Held Through Foreign Accounts

  226   

Federal Estate Tax

  226   

UNDERWRITING

  227   

VALIDITY OF CLASS A SHARES

  230   

EXPERTS

  230   

EXPECTED CHANGE IN CERTIFYING ACCOUNTANTS

  230   

WHERE YOU CAN FIND MORE INFORMATION

  230   

INDEX TO FINANCIAL STATEMENTS

  F-1   

APPENDIX A—FORM OF AGREEMENT OF LIMITED PARTNERSHIP OF 8POINT3 ENERGY PARTNERS LP

  A-1   

APPENDIX B—FORM OF AGREEMENT OF LIMITED LIABILITY COMPANY OF 8POINT3 OPERATING COMPANY, LLC

  B-1   

APPENDIX C—GLOSSARY

  C-1   

We have not, and the underwriters have not, authorized anyone to provide you with any information or represent anything about us other than what is in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We do not, and the underwriters and their affiliates and agents do not, take any responsibility for, and can provide no assurance as to the reliability of, any information that others may provide to you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. Unless otherwise indicated, you should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

 

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MARKET AND INDUSTRY DATA

We obtained the industry, market and competitive position data used throughout this prospectus from our own internal estimates as well as from industry publications and research, surveys and studies conducted by third parties, including the U.S. Department of Energy, the International Energy Agency, the U.S. Energy Information Administration, the Bloomberg New Energy Finance, Renewable Energy Policy Network for the 21st Century, the Solar Energy Industries Association and Lazard Ltd. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe our internal company research is reliable and the market definitions are appropriate, neither such research nor these definitions have been verified by any independent source. Estimates of historical growth rates in the markets where we operate are not necessarily indicative of future growth rates in such markets. While we are not aware of any misstatements regarding the market, industry or similar data presented herein, such data involve risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Forward-Looking Statements” and “Risk Factors” in this prospectus.

 

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CERTAIN TERMS USED IN THIS PROSPECTUS

Unless the context provides otherwise, references herein to “we,” “us,” “our” and “8point3 Partners” or like terms, when used in a historical context, refer to the projects that our Sponsors (as defined below) are contributing to us in connection with this offering. When used in the present tense or prospectively, such terms refer to 8point3 Energy Partners LP together with its consolidated subsidiaries, including OpCo (as defined below), after giving effect to the Formation Transactions (as defined under “Prospectus Summary—Formation Transactions”). References herein to “our predecessor” refer to the operations of the SunPower Project Entities (as defined below) prior to the completion of this offering. References herein to “our general partner” refer to 8point3 General Partner, LLC. References herein to “OpCo” refer to 8point3 Operating Company, LLC and its subsidiaries. Upon completion of this offering, we will own a controlling non-economic managing member interest in OpCo and a     % limited liability company interest in OpCo represented by OpCo common units and our Sponsors will collectively own a     % limited liability company interest in OpCo represented by both OpCo common and subordinated units. Unless otherwise specifically noted, financial results and operating data are shown on a 100% basis and are not adjusted to reflect our Sponsors’ non-controlling interest in OpCo. For an explanation of certain terms we use to describe our business and industry and other terms used in this prospectus please read the “Glossary” beginning on page C-1 of this prospectus.

References within this prospectus to:

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

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

“C&I Project Entities” refers to the Macy’s Project Entity and the UC Davis Project Entity;

“Contributing Sponsor” refers, with respect to each project in the Initial Portfolio, to that Sponsor that directly or indirectly owned such project prior to the completion of this offering.

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

“First Solar Project Entities” refers to the Lost Hills Blackwell Project Entity, the Maryland Solar Project Entity, the North Star Project Entity and the Solar Gen 2 Project Entity;

“First Solar ROFO Projects” refers to, collectively, the projects set forth in the chart under the heading “Business—Our Portfolio—ROFO Projects” with First Solar listed as the “Developing Sponsor” and as to which we have a right of first offer under the First Solar ROFO Agreement (as defined under “Certain Relationships and Related Party Transactions—ROFO Agreements”) should First Solar decide to sell them;

“Holdings” refers to 8point3 Holding Company, LLC, a limited liability company formed under the laws of the State of Delaware by First Solar and SunPower and the parent of our general partner;

“Initial Portfolio” refers to, collectively, our initial portfolio of solar energy projects, which consists of the Lost Hills Blackwell Project, the Macy’s Project, the Maryland Solar Project, the North Star Project, the Quinto Project, the Solar Gen 2 Project, the RPU Project, the UC Davis Project and the Residential Portfolio;

 

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

“Lost Hills Blackwell Project Entity” refers to FSAM Lost Hills Blackwell Holdings, LLC;

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

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

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

“Macy’s Project Entity” refers to Solar Star California XXX, LLC;

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

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

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

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

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

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

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

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

“Residential Portfolio” refers to the approximately 5,900 solar installations located at homes in Arizona, California, Colorado, Hawaii, Massachusetts, New Jersey, New York, Pennsylvania and Vermont, that is held by the Residential Portfolio Project Entity and has an approximate aggregate nameplate capacity of 39 MW;

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

“ROFO Portfolio” refers to, collectively, our portfolio of ROFO Projects;

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

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

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

 

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

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

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

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

“SunPower Project Entities” refers to the Macy’s Project Entity, the Quinto Project Entity, the RPU Project Entity, the UC Davis Project Entity and the Residential Portfolio Project Entity;

“SunPower ROFO Projects” refers to, collectively, the projects set forth in the chart under the heading “Business—Our Portfolio—ROFO Projects” with SunPower listed as the Developing Sponsor and as to which we have a right of first offer under the SunPower ROFO Agreement (as defined under “Certain Relationships and Related Party Transactions—ROFO Agreements”) should SunPower decide to sell them;

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

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

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

 

 

Our Sponsors’ development pipeline consists of early to advanced-stage utility and C&I projects meeting the following criteria:

Our Sponsors consider a project to be in early-stage development when at least one or more of the following development milestones in respect of a project have been achieved: project-related site control in some form (e.g., option, lease, ownership), preparation of some or all material project-related permitting applications, preliminary interconnection planning and studies or identification of a potential offtake opportunity.

Our Sponsors consider a project to be in advanced-stage development when all of the following development milestones in respect of a project have been achieved: obtaining some or all material project-related permits, securing interconnection, having a reasonable expectation for the sale of output related to the project, which may include being in negotiations, shortlisted or contracted for the potential offtake agreement opportunity, and securing necessary real estate rights in respect of the project.

Projects are removed from the pipeline if a determination is made to no longer pursue development activities in respect of the project.

 

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FORWARD-LOOKING STATEMENTS

Some of the information in this prospectus may contain forward-looking statements. Forward-looking statements give our current expectations, contain projections of results of operations or of financial condition or forecasts of future events. Words such as “could,” “will,” “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential” or “continue” and similar expressions are used to identify forward-looking statements. Without limiting the generality of the foregoing, forward-looking statements contained in this prospectus include our expectations of plans, strategies, objectives, growth and anticipated financial and operational performance. Forward-looking statements can be affected by assumptions used or by known or unknown risks or uncertainties.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement, including industry data referenced elsewhere in this prospectus. We have chosen these assumptions or bases in good faith and that they are reasonable. However, when considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this prospectus. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:

 

    the failure of our projects, including our Initial Portfolio, any SunPower ROFO Project, any First Solar ROFO Project or any other project we may acquire, to perform as we expect or to reach its commercial operation date, or COD;

 

    risks inherent in newly constructed solar energy projects, including underperformance relative to our expectations, system failures and outages;

 

    risks inherent in the operation and maintenance of solar energy projects;

 

    the impairment or loss of any one or more of the projects in our Initial Portfolio, such as the Solar Gen 2 Project or the Quinto Project, or any other projects we may acquire;

 

    terrorist or other attacks and responses to such acts;

 

    a natural disaster or other severe weather or meteorological conditions or other event of force majeure;

 

    the occurrence of a significant incident for which we do not have adequate insurance coverage;

 

    the failure of a supplier to fulfill its warranty or other contractual obligations;

 

    the inability of our projects to operate or deliver energy for any reason, including if interconnection or transmission facilities on which we rely become unavailable;

 

    liabilities and operating restrictions arising from environmental, health and safety laws and regulations;

 

    changes in U.S. federal, state, provincial and local laws, regulations, policies and incentives;

 

    risks associated with litigation and administrative proceedings;

 

    a failure to comply with anti-corruption laws and regulations in the United States and elsewhere;

 

    risks associated with our ownership or acquisition of projects that remain under construction;

 

    the risk that our limited number of offtake counterparties will be unwilling or unable to fulfill their contractual obligations to us or that they otherwise terminate their agreements with us;

 

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    our inability to renew or replace expiring or terminated agreements, such as our offtake agreements, at favorable rates or on a long-term basis;

 

    energy production by our projects or availability of our projects that does not satisfy the minimum obligations under our offtake agreements;

 

    a failure to locate and acquire interests in additional, attractive projects at favorable prices;

 

    limits on OpCo’s ability to grow and make acquisitions because of its obligations under its limited liability company agreement to distribute available cash;

 

    lower prices for fuel sources used to produce energy from other technologies, which could reduce the demand for solar energy;

 

    risks to our Sponsors and third party development companies relating to project siting, financing, construction, permitting, the environment, governmental approvals and the negotiation of project development agreements, reducing opportunities available to us;

 

    risks inherent in the acquisition of existing solar energy projects;

 

    substantial competition from utilities, independent power producers and other industry participants;

 

    conflicts arising from our general partner’s or our Sponsors’ relationship with us;

 

    increases in our tax liability; and

 

    certain factors discussed elsewhere in this prospectus.

Each forward-looking statement speaks only as of the date of the particular statement and we undertake no obligation to publicly update or revise any forward-looking statements except as required by law.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you need to consider in making your investment decision. Before making an investment decision, you should read this entire prospectus carefully and should consider, among other things, the matters set forth under “Risk Factors,” “Selected Historical and Pro Forma Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as the combined carve-out and pro forma condensed combined financial statements and the related notes to those financial statements included elsewhere in this prospectus. Unless otherwise indicated, the information in this prospectus assumes: (i) an initial public offering price of $             per Class A share (the midpoint of the price range set forth on the cover page of this prospectus) and (ii) that the underwriters do not exercise their option to purchase additional Class A shares. As used in this prospectus, all references to watts (e.g., megawatts, or MW, or gigawatts, or GW) refer to measurements of alternating current, or AC, except where otherwise noted. Our name is derived from the average amount of time it takes light from the sun to reach the earth, which is 8.3 minutes.

8point3 Energy Partners LP

Overview

We are a growth-oriented limited partnership formed by First Solar and SunPower to own, operate and acquire solar energy generation projects. Upon completion of this offering, our Initial Portfolio, which we will acquire from our Sponsors, will have interests in 432 MW of solar energy projects. Our primary objective is to generate predictable cash distributions that grow at a sustainable rate. We intend to achieve this objective by acquiring high-quality solar assets primarily developed by our Sponsors that generate long-term contracted cash flows and serve utility, commercial and industrial, or C&I, and residential customers in the United States and other select markets, primarily within the countries that comprise the Organization for Economic Co-operation and Development, or the OECD.

We believe our relationship with our Sponsors provides us with a significant competitive advantage. Our Sponsors have demonstrated track records of developing solar energy projects in our target markets. For example, between 2005 and 2014, our Sponsors developed, built or supplied solar modules to approximately 39% of the 18.1 GW of solar power capacity installed in the United States and approximately 11% of the solar power capacity installed in the OECD. As of March 31, 2015, on a combined basis, our Sponsors had identified a development pipeline (as defined in the “Certain Terms Used in this Prospectus”) of        GW of potential solar energy project opportunities, ranging from early stage to advanced development. We will have a right of first offer, or ROFO, on interests in 1,131 MW of the advanced development stage projects included in this pipeline, all of which are located in our target markets. Our Sponsors’ development track records are enhanced by their vertically integrated business models across the solar value chain, from solar module and select balance of systems manufacturing to providing engineering, procurement and construction, or EPC, and operations and maintenance, or O&M, services, which enables them to more efficiently develop solar energy projects.

We believe the key drivers of solar energy industry growth are the following:

 

   

Increasing demand for solar energy.    Global energy demand is increasing due to economic development and population growth. The Energy Information Administration, or the EIA, projects OECD electricity generation to increase 34% between 2014 and 2040, requiring a capacity increase of more than 600 GW, which will include solar energy projects. Due to

 

 

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exposure to volatile fossil fuel costs, increasing concern about carbon emissions and a variety of other factors, customers are seeking alternatives to traditional sources of electricity generation. As a form of electricity generation that is not dependent on fossil fuels, does not produce greenhouse gas emissions and whose costs are falling, solar energy is well positioned to continue to capture an increasing share of this new build capacity.

 

    Retirement of traditional sources of generation.    The coal-fired power generation industry is facing increased environmental scrutiny and regulation. In the United States, the Environmental Protection Agency, or EPA, has proposed new rules under the Clean Air Act targeting emissions of greenhouse gases, sulfur dioxide and nitrogen oxides from traditional coal-fired plants. According to the EIA, the percentage of electricity generated by coal in the United States decreased from 52% in 2000 to 40% in 2013 and is expected to further decrease to 32% by 2040. Other countries that we intend to target have adopted similar restrictions. In addition, global nuclear power generation decreased by 10% from 2010 to 2013 according to the International Energy Agency, or IEA, primarily as a result of Germany permanently shutting down eight nuclear reactors and Japan’s suspension of operations at its nuclear facilities following the Fukushima Daiichi nuclear disaster.

 

    Increasing penetration of distributed solar generation.    Distributed solar generation, or DG Solar, systems are solar energy systems deployed at the site of end-use, such as businesses and homes. These systems benefit from not needing to recover the expense associated with using the electric transmission system. DG Solar enables the generation and use of solar power by residential and C&I customers at a relatively predictable, stable and competitive cost. According to Bloomberg New Energy Finance, or BNEF, small-scale, or non-utility scale, solar capacity in our current and potential markets is expected to grow from 67 GW in 2014 to 440 GW in 2030.

 

    Decreasing solar costs opening new markets.    The levelized cost of energy, or LCOE, represents the all-in cost of constructing, owning and operating an electric generation facility on a per MWh basis and is a means of comparing cost competitiveness across different generation sources. Recent advances in solar technology, such as increased solar module efficiency, combined with greater economies of scale, declining input costs and relatively low variable O&M cost, have led to a significant decrease in solar energy’s LCOE. As solar energy’s LCOE falls, solar energy approaches “grid parity,” which is the point at which solar energy can generate electricity at a cost equal to existing sources of generation. Solar energy generation is reaching or has reached grid parity in an increasing number of markets as solar LCOE declines and competing electricity prices continue to increase.

 

    Government incentives for solar.    Many OECD governments have supported the growth of the solar industry through various tax incentives, price incentives (e.g., feed-in-tariffs), subsidies, mandates requiring utilities to use renewable energy and favorable net metering policies. For a discussion of incentives provided by U.S. federal and state governments, please read “Industry—Solar Energy Markets—United States.”

 

    Emergence of new business opportunities.    As the solar energy market continues to mature, new business models, including firm power, direct access and community solar, are emerging that represent additional opportunities for solar industry growth. For a discussion of these new opportunities, please read “Industry—Key Drivers of Solar Energy Industry Growth—Emergence of new business opportunities.”

 

 

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Upon the completion of this offering, we will own interests in six utility-scale solar energy projects, four of which are operational and two of which are in late-stage construction. These assets will represent 87% of the generating capacity of our Initial Portfolio upon all projects attaining COD. We will also own interests in a portfolio of C&I and residential DG Solar assets, which will represent 13% of the generating capacity of our Initial Portfolio. Our Initial Portfolio is located entirely in the United States and consists of utility-scale and C&I assets that sell substantially all of their output under long-term, fixed-price offtake agreements with investment grade offtake counterparties and residential DG Solar assets that are leased under long-term fixed-price offtake agreements with high credit quality residential customers with FICO scores averaging 765 at the time of initial contract. As of December 31, 2014, the weighted average remaining life of offtake agreements across our Initial Portfolio was 21.3 years. In addition, we will have a right of first offer on certain of our Sponsors’ solar energy projects that are currently contracted or expected to be contracted prior to the closing of this offering, should our Sponsors decide to sell such projects during the term of our ROFO Agreements.

We intend to make quarterly distributions of cash to holders of our Class A shares in accordance with “Our Cash Distribution Policy and Restrictions on Distributions.” Our initial quarterly distribution will be set at $             per Class A share or $             per Class A share on an annualized basis. Because not all of our Initial Projects are fully operational, our Sponsors have agreed to forego distributions declared on their OpCo common and subordinated units until such fiscal quarter commencing on or after March 1, 2016, that the board of directors of our general partner, with the concurrence of the conflicts committee, determines that OpCo will generate sufficient cash available for distribution without such forbearance for us to pay the full initial quarterly distribution for such quarter and the successive quarter. We intend to target an annual growth rate of our distributions of 12% – 15% per Class A share over the three-year period following completion of this offering. This target is based on our Sponsors’ intention to offer us ROFO Projects on a schedule designed to produce such an increase. Furthermore, we believe we will have opportunities in the United States and in other OECD member countries to acquire solar projects with characteristics similar to the projects in our Initial Portfolio, which we expect to give us the opportunity to increase the amount of cash available for distribution over time. While we believe our targeted growth rate is reasonable, it is based on estimates and assumptions regarding a number of factors, many of which are beyond our control, and we may not be able to expand our business at a rate consistent with our expectations, if at all.

 

 

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Our Portfolio

Initial Projects

The following table provides an overview of the assets that will comprise our Initial Portfolio:

 

Project

  Location   COD(1)   MW(ac)(2)   Contributing
Sponsor
  Ownership
Percentage
  Counterparty   Counterparty
Credit
Rating /

Avg. FICO
Score
  Remaining
Term of
Offtake
Agreement(3)

(years)
 

Utility

               

Maryland Solar

  Maryland   February
2014
  20   First Solar   100%(4)   First Energy
Solutions
  BBB-     18.3   

Solar Gen 2

  California   November
2014
  150   First Solar   49%(5)   San Diego Gas
& Electric
  A     24.9   

Lost Hills / Blackwell

  California   April

2015

  32   First Solar   49%(6)   City of Roseville /
Pacific Gas and
Electric
  AA+ / BBB    
 
28.7
 
(7) 
  

North Star

  California   June

2015

  60   First Solar   49%(6)   Pacific Gas and
Electric
  BBB     20.0   

RPU

  California   September
2015
  7   SunPower   100%(8)   City of Riverside   A-     25.0   

Quinto

  California   October
2015
  108   SunPower   100%(8)   Southern
California
Edison
  BBB+     20.0   

C&I

               

UC Davis

  California   September
2015
  13   SunPower   100%(8)   University of
California
  AA     20.0   

Macy’s

  California   November
2015
  3   SunPower   100%(8)   Macy’s
Corporate
Services
  BBB+     20.0   

Residential Portfolio

  U.S. – Various   June

2014

  39   SunPower   100%   Approx. 5,900
homeowners
  765 Average /
680 Minimum(9)
    17.5 (10) 
     

 

         

Total

      432          
     

 

         

 

(1) For each utility project that has yet to reach its commercial operation date, or COD, and for the UC Davis Project, COD is the expected COD. For the Macy’s Project, COD represents the expected COD of the last site for such project. For our Residential Portfolio, COD represents COD of the last site for such project.
(2) The MW for the projects in which we own or will own less than a 100% interest are shown on a gross basis.
(3) Remaining term of offtake agreement is measured from the later of December 31, 2014 or the COD of the applicable project.
(4) 100% of the Maryland Solar Project Entity will be contributed to OpCo at the closing of this offering, upon which the Maryland Solar Project will be leased back to First Solar for a period of six years. For a description of this sale-leaseback transaction, please read “Certain Relationships and Related Party Transactions—Maryland Solar Lease Arrangement.”
(5) An affiliate of Southern Company, which is not affiliated with First Solar, owns a 51% economic ownership interest in the Solar Gen 2 Project.
(6) Currently, each of the Lost Hills Blackwell Project and the North Star Project is wholly owned by First Solar. At or prior to the closing of this offering, First Solar expects to enter into a tax equity arrangement for each of the Lost Hills Blackwell Project and the North Star Project similar to the tax equity arrangements currently in place for the Solar Gen 2 Project so that First Solar’s expected economic ownership percentage will be 49%.
(7) Remaining term comprised of 3.7 years on a power purchase agreement, or PPA, with the City of Roseville, California, followed by a 25-year PPA with Pacific Gas and Electric starting in 2019.
(8) We expect that SunPower will enter into tax equity arrangements related to each of these projects prior to the completion of this offering.
(9) Measured at the time of initial contract.
(10) Remaining term is the weighted average duration of all of the residential leases. The shortest remaining term is 16.0 years and the longest remaining term is 19.5 years.

 

 

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The following charts provide an overview of the characteristics of our Initial Portfolio by offtake counterparty, contract years remaining and country:

 

Offtake Counterparty(1)

  

Contract Years Remaining(2)

  

Country

 

LOGO

  

 

LOGO

  

 

LOGO

 

(1) Weighted average based on MW capacity.
(2) Weighted average based on MW capacity and ownership percentage.

ROFO Projects

Our primary objective is to generate predictable cash distributions that grow at a sustainable rate. Our Sponsors have granted us rights of first offer on certain of their solar energy projects that are currently contracted or are expected to be contracted prior to being sold, should our Sponsors decide to sell such projects during the term of such agreements. Our ROFO Agreements include assets similar to the projects in our Initial Portfolio and represent interests in 1,131 MW capacity, or more than 2.6 times our Initial Portfolio. The following table provides a brief description of the ROFO Projects:

 

Project

  Location   COD(1)   MW(ac)(2)   Developing
Sponsor
  Counterparty   Counterparty
Credit Rating /
Avg. FICO
Score
  Remaining
Term of
Offtake
Agreement(3)

(years)
 

Utility

             

Contracted

           

Moapa

  Nevada   December 2015   250   First Solar   Los Angeles
Dept. of
Water and
Power
  AA-     25.0   

Kingbird

  California   December 2015   40   First Solar   Southern
California
Public Power
Authority(4)
  AA-     20.0   

Cuyama

  California   October 2016   40   First Solar   Pacific Gas
and Electric
  BBB     25.0 (5) 

Hooper

  Colorado   April 2016   52   SunPower   Public Service
Company of
Colorado
  A-     20.0   

Henrietta

  California   July 2016   102   SunPower   Pacific Gas
and Electric
  BBB     20.0   

Stateline

  California   December 2016   300   First Solar   Southern
California
Edison
     BBB+     20.0   

Advanced Development

           

Project #1

  Japan   December 2016   11   SunPower      

Project #2

  Chile   July 2016   100   SunPower      

Project #3

  Chile   June 2017   88   SunPower      

 

 

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Project

  Location   COD(1)   MW(ac)(2)   Developing
Sponsor
  Counterparty   Counterparty
Credit Rating /
Avg. FICO
Score
  Remaining
Term of
Offtake
Agreement(3)

(years)
 

C&I

             

Contracted

           

Commercial Portfolio #1

  U.S. – Various   November
2014
  45   SunPower   Various       15.8 (6) 

Awarded(7)

             

Project #4

  U.S.   December
2015
  6   SunPower      

Project #5

  U.S.   December
2015
  2   SunPower      

Project #6

  U.S.   August
2016
  8   SunPower      

Project #7

  U.S.   August
2016
  4   SunPower      

Commercial Portfolio #2

  U.S.   December
2016
  49   SunPower      

Residential ROFO Portfolio

  U.S. – Various   October
2014
  34   SunPower   Approx. 5,000
homeowners
  766 Average /

700 Minimum(8)

    18.7 (9) 
     

 

       

Total

      1,131        
     

 

       

 

(1) For each utility project, COD is the expected COD. For C&I projects that have yet to reach COD, COD represents the expected COD of the last site for such project. For C&I Projects that have attained COD and for our Residential ROFO Portfolio, COD is the COD of the last site for such project. At or prior to COD of our projects, the Sponsors may enter into arrangements, often referred to as tax equity financing, to monetize the tax attributes of their projects which may result in a reduction of our expected economic ownership. These arrangements have multiple potential structures which have differing impacts on our economic ownership, but can include arrangements consistent with the arrangement currently in place for the Solar Gen 2 Project which will result in our expected economic ownership percentage being 49% at the time of contribution. In addition, the Sponsors may sell a portion of the equity in non-U.S. projects to development partners.
(2) The MW for the projects in which our Sponsors own less than a 100% interest are shown on a gross basis.
(3) Remaining term of offtake agreement is measured from the later of December 31, 2014 or the COD of the applicable project.
(4) The Kingbird project is subject to two separate PPAs with member cities of the Southern California Public Power Authority.
(5) Remaining term does not include 2.8 years of uncontracted merchant power prior to a 25-year PPA with Pacific Gas and Electric starting in 2019.
(6) Remaining term is the weighted average duration of all of the commercial PPAs. The shortest remaining term is 13.5 years and the longest remaining term is 17.8 years.
(7) Awarded projects are projects that have been awarded by the offtake counterparty to the developing Sponsor and are expected to be contracted by the closing of this offering.
(8) Measured at the time of initial contract.
(9) Remaining term is the weighted average duration of all of the residential leases. The shortest remaining term is 18.0 years and the longest remaining term is 20.0 years.

 

 

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We believe the ROFO Projects will have many of the characteristics of the projects in our Initial Portfolio, including stable cash flows from long-term offtake agreements with creditworthy offtake counterparties and newly constructed, long-lived facilities. The following charts provide an overview of the characteristics of our ROFO Portfolio by offtake counterparty and country, in each case based on MW capacity:

 

Offtake Counterparty

  

Country

 

LOGO

  

 

LOGO

The ROFO Projects may not be completed and even if they are completed, our Sponsors will not be obligated to offer them to us at prices or on terms that allow us to achieve our targeted growth rate, or at all, and even if we are offered such acquisition opportunities, we may not be able to consummate acquisitions from either Sponsor. Furthermore, in connection with arrangements to monetize tax attributes or the development of non-U.S. projects, our Sponsors are permitted to sell a partial economic ownership in their projects without offering us the opportunity to acquire such interests. Even if we consummate such acquisitions, the acquired projects may not perform as expected and we may not achieve our targeted growth rate. Please read “Risk Factors” for risks associated with our forecast and our ability to consummate acquisitions.

Our Business Strategies

Our primary objective is to generate predictable cash distributions that grow at a sustainable rate. We intend to achieve this objective through the following strategies:

Own and operate long-term contracted solar generation assets

We believe that contracted solar energy projects generate predictable cash flows. Solar power is generally sold under long-term offtake agreements that require the purchaser to acquire all of the power that is produced by the solar energy project. The principal factor affecting the amount of power produced is the level of sunlight reaching the project, which is largely predictable over the long term. Solar energy systems generate most of their electricity during the time of peak demand, when energy from the sun is strongest. In addition, solar energy projects contain limited operational and technology risks given their modular nature and minimum number of moving parts, which results in relatively low, stable and predictable O&M expenses. We intend to continue to own and operate long-term contracted solar energy systems as we grow our business and project portfolio over time.

Acquire assets in our target markets

We intend to pursue strategic opportunities to grow our company through acquisitions, primarily from our Sponsors, of long-term contracted solar energy projects that have commenced, or are close to commencing, commercial operations and that have characteristics similar to our Initial Portfolio, including reliable technology with relatively stable cash flows. Under the ROFO Agreements with our Sponsors, our Sponsors will be required for a period of five years from the closing of this offering to offer us the opportunity to purchase their interests in certain solar energy projects should they seek to

 

 

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sell such interests to a third party. As of December 31, 2014, the weighted average remaining life of the offtake agreements for the currently contracted projects in our ROFO Portfolio is over 20 years. In addition to making acquisitions from the ROFO Portfolio, we will seek to acquire solar assets with similar long-term contracted cash flow profiles primarily from our Sponsors and in some cases from other third-party developers and owners of solar energy systems.

Capitalize on our Sponsors’ leading solar O&M services

We believe we will benefit from our Sponsors’ vertically integrated business models across the solar value chain. We believe these business models enable our Sponsors to more effectively operate and maintain solar energy projects. For example, First Solar and SunPower have each consistently maintained utility-scale solar energy system availability above 99.5%. Through various O&M agreements, each Sponsor, subject to oversight by the board of directors of our general partner, will continue to manage and operate all but one of the contributed projects, providing continuity and quality assurance of the O&M services.

Expand into new strategic markets

We intend to capitalize on opportunities to expand into new markets over time. Our ROFO Portfolio contains utility-scale solar energy projects located in the United States, Chile and Japan, and we will consider expanding our portfolio to include new assets in target markets primarily within additional OECD member countries, including Australia, Canada, France, Germany, Mexico and the United Kingdom. Our criteria for entering into new markets will include an assessment of the market’s macroeconomic environment, project level economics, demand for solar energy and regulatory policy and legal framework for the solar industry.

Maintain financial flexibility

At the closing of this offering, we will have a $             million term loan and $             available under our revolving credit facility. Our ability to borrow under our revolving credit facility and our ability to access the debt and equity capital markets should provide us with the financial flexibility to pursue acquisition opportunities. We will not have any indebtedness at our project subsidiaries at the closing of this offering.

Competitive Strengths

We believe we are well positioned to successfully execute our business strategies because of the following competitive strengths:

Our visible growth platform

First Solar and SunPower have extensive and global experience developing substantial portfolios of solar assets ranging from small residential DG Solar systems to large utility-scale solar energy projects. Between 2005 and 2014, our Sponsors developed, built or supplied solar modules to approximately 39% of the 18.1 GW of solar power capacity installed in the United States and approximately 11% of the solar power capacity installed in the OECD. This significant market reach has been supported by our Sponsors’ demonstrated ability to finance project development and construction. Since 2005, our Sponsors have collectively financed the development and construction of over 4.4 GW of solar projects. Our Sponsors have historically sold interests in certain of their solar projects to leading providers of energy services such as Berkshire Hathaway Energy Company and Southern Company, and have raised financing from major financial institutions such as U.S. Bank,

 

 

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PNC Bank and Wells Fargo & Company. We believe our Sponsors’ significant development pipeline and financial strength will position them to continue to capture a meaningful share of future solar development opportunities. We believe we will be well positioned to benefit from this growth as our Sponsors are our largest shareholders and the owners of our general partner and are therefore incentivized to act in a manner that promotes the growth of our operations and cash distributions.

Our high-quality portfolio

Our Initial Portfolio consists of high-quality, newly constructed assets, with long expected asset lives that are diversified across solar photovoltaic technologies and customer sectors.

 

    Leading technologies.    First Solar and SunPower are the respective leaders in thin film and crystalline silicon solar technologies manufactured to the highest quality and environmental standards, with combined research and development experience of over 40 years. Our initial assets, developed by our Sponsors, utilize, or will utilize, these leading technologies described further below.

 

    First Solar technologies.    First Solar produces advanced cadmium telluride thin film modules that have a proven energy yield advantage in hot and humid temperature environments due to superior spectral response and temperature coefficient. First Solar modules have been verified by independent engineers and certified to international performance and safety standards by third-party laboratories around the world. First Solar has set 8 new cell conversion efficiency records since 2011 and its production modules have demonstrated the fastest module efficiency improvement of any technology over the past two years.

 

    SunPower technologies.    SunPower produces high-performance crystalline silicon solar modules with average conversion efficiencies exceeding 21.5%, making SunPower modules among the most efficient commercially available and particularly well suited for space constrained environments. SunPower modules use a differentiated back-contact cell, which significantly improves performance and reliability. SunPower’s modules are manufactured to the highest quality and environmental management standards.

 

    Diversified offtake counterparties.    Our portfolio provides power to three customer sectors: utility, C&I and residential. Of our Initial Portfolio, approximately 87% of our generating capacity is under contract with utility-scale customers and 13% of our generating capacity is under contract with C&I or residential customers. We believe that our presence in all three sectors allows us to capitalize on the different growth profiles within the solar energy landscape and to maximize our total addressable market.

 

    Recently developed projects.    Our Initial Portfolio is comprised of newly developed projects, with four of our utility projects and two of our C&I projects being in the final stages of construction and two of our utility projects and approximately 85% of our residential portfolio attaining COD within the last two years and all of our residential portfolio attaining COD within the last four years. At the closing of this offering, of the six utility-scale projects, four will be operational. Our projects generally have an expected useful economic life of over 30 years. Moreover, all of the projects in our Initial Portfolio employ the leading technologies of our Sponsors.

 

 

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Our pure play business model

Our Initial Portfolio and ROFO Portfolio are comprised entirely of solar energy projects owned by, to be acquired from, or being developed by, our Sponsors. We believe that concentrating our efforts and focusing our resources on solar energy will enhance our operational efficiency and ability to meet our objective to generate predictable cash distributions that grow at a sustainable rate. In addition, we believe that having our Sponsors as our key module providers and utilizing their leading solar module technology to generate power further maximizes operational benefits and reliability, and differentiates us from our competitors, who utilize generation technology acquired from multiple unrelated module suppliers.

Our strategic relationship with our Sponsors

Our Sponsors’ interests are highly aligned with ours. Our ability to grow and continually acquire projects from our Sponsors is expected to be an important source of funding for our Sponsors’ core solar module manufacturing businesses. All of the projects in our Initial Portfolio and ROFO Portfolio were developed, or are being developed, by our Sponsors. In addition, First Solar and SunPower will retain a collective     % interest in OpCo and receive distributions on their OpCo units following the forbearance period. In addition, through their ownership of Holdings, our Sponsors hold all of the incentive distribution rights, or IDRs, in OpCo which represent a variable interest in distributions after certain distribution thresholds are met. The IDR mechanism provides a further economic incentive for our Sponsors to facilitate our growth over time.

Predictable and sustainable cash flows

We expect our Initial Portfolio to support a consistent cash flow profile that will serve as a stable base for the growth of our cash distributions over time. The projects in our Initial Portfolio consist of utility-scale and C&I assets that sell substantially all of their output under long-term, fixed-price offtake agreements with investment grade offtake counterparties and residential DG Solar assets that are leased under long-term fixed-price offtake agreements with high credit quality residential customers with FICO scores averaging 765 at the time of initial contract. Furthermore, our O&M costs are expected to be predictable, because we have no fuel or feedstock costs and relatively low maintenance costs.

Management and operational expertise

We believe that we have a distinct advantage in having two of the leading vertically integrated solar providers as our Sponsors. Our chief executive officer serves as the chief financial officer of SunPower, and our chief financial officer serves as the chief financial officer of First Solar. Our officers have considerable experience in manufacturing, developing, financing, operating and maintaining solar power generation assets. Our management team also has access to the other significant management resources of our Sponsors to support the operational, financial, legal and regulatory aspects of our business.

Our Sponsors

First Solar (NASDAQ: FSLR) is a leading global provider of comprehensive photovoltaic solar systems, which use its advanced module and system technology. First Solar develops, finances, engineers, constructs and operates solar power generation assets, with over 10 GW installed worldwide. First Solar’s integrated power plant solutions deliver an economically attractive alternative to fossil-fuel electricity generation. From raw material sourcing through end-of-life module recycling,

 

 

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First Solar renewable energy systems protect and enhance the environment. As of December 31, 2014, First Solar had total assets of $6.7 billion.

SunPower (NASDAQ: SPWR) designs, manufactures and delivers the highest efficiency, highest reliability solar panels and systems available today. Residential, business, government and utility customers rely on the company’s 30 years of experience. Headquartered in San Jose, California, SunPower has offices in North and South America, Europe, Australia, Africa and Asia. As of December 28, 2014, SunPower had total assets of $4.4 billion. SunPower is majority owned by Total S.A., the fifth largest publicly-listed energy company in the world.

The following is a summary of certain agreements that we will enter into with our Sponsors or their affiliates in connection with this offering. Because of our relationship with our Sponsors, our agreements with our Sponsors or their affiliates may not be as favorable to us as they might have been had we negotiated them with an unaffiliated third party. For a more comprehensive discussion of the agreements that we will enter into with our Sponsors or their affiliates, please read “Certain Relationships and Related Party Transactions.” For a discussion of the risks related to our relationship with our Sponsors, please read “Risk Factors—Risks Related to Our Relationship with our Sponsors.”

Management Services Agreements.    We, our general partner, OpCo and Holdings will enter into a Management Services Agreement, or MSA, with an affiliate of SunPower and a separate, but similar, MSA with an affiliate of First Solar, each, under its respective MSA, a Service Provider, under which:

 

    the Service Providers will provide or arrange for the provision of administrative and management services for us and certain of our subsidiaries, including managing our day-to-day affairs, which are in addition to those services that are provided under existing O&M agreements and asset management agreements, or AMAs, between affiliates of our Sponsors and certain of our project subsidiaries; and

 

    OpCo will pay each Service Provider an annual management fee equal to $     million, in the case of the First Solar MSA, and $     million, in the case of the SunPower MSA, which amounts shall be adjusted annually for inflation. Between December 1, 2015 and November 30, 2016, each Service Provider will have a one-time right to increase the management fee by an amount not to exceed     %. The management fee will be paid in monthly installments.

Please read “Certain Relationships and Related Party Transactions—Management Services Agreements.”

Omnibus Agreement.    We will enter into an omnibus agreement, or the Omnibus Agreement, with our Sponsors, our general partner, OpCo and Holdings, under which (i) each Sponsor will be granted an exclusive right to perform certain services not otherwise covered by an O&M agreement or AMA on behalf of the Project Entities contributed by such Sponsor, (ii) with respect to any project in the Initial Portfolio that has not achieved commercial operations as of the closing of this offering, the Sponsor who contributed such project will agree to pay to OpCo all costs required to complete such project, as well as certain liquidated damages in the event such project fails to achieve operability pursuant to an agreed schedule, (iii) each Sponsor will agree to indemnify OpCo for any costs it incurs with respect to certain tax-related events, and (iv) the parties will agree to a mutual undertaking regarding confidentiality and use of names, trademarks, trade names and other insignias. Please read “Certain Relationships and Related Party Transactions—Omnibus Agreement.”

ROFO Agreements.    Under the terms of the right of first offer agreements, or the ROFO Agreements, between OpCo and each of our Sponsors, the applicable Sponsor will grant OpCo a right

 

 

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of first offer to purchase any of its ROFO Projects in the event of any proposed sale, transfer or other disposition of such ROFO Projects, or any portion thereof, for a period of five years following the completion of this offering. Under the ROFO Agreements, if OpCo exercises the right, each Sponsor will agree to negotiate with OpCo in good faith, for a period of 45 days, to reach agreement on a transaction with respect to any proposed sale of the applicable ROFO Project. Under the ROFO Agreements, however, neither Sponsor will be obligated to sell any of the ROFO Projects. Accordingly, we do not know when, if ever, these projects will be made available to OpCo. The likelihood and timing of OpCo’s ability to acquire any ROFO Projects will depend upon, among other things, the determination that the acquisition is appropriate for our business at that particular time, our ability to agree on mutually acceptable terms of purchase, including price, our ability to obtain financing on acceptable terms and our ability to obtain any necessary consents. Please read “Certain Relationships and Related Party Transactions—ROFO Agreements.”

Exchange Agreement.    We will enter into an exchange agreement, or Exchange Agreement, with our Sponsors, our general partner and OpCo, under which a Sponsor can tender OpCo common units and an equal number of such Sponsor’s Class B shares, together referred to as the Tendered Units, for redemption to OpCo and us. Each Sponsor has the right to receive, at the election of OpCo with the approval of the conflicts committee, either the number of our Class A shares equal to the number of Tendered Units or a cash payment equal to the number of Tendered Units multiplied by the then current trading price of our Class A shares. In addition, we have the right but not the obligation, to directly purchase such Tendered Units for, subject to the approval of our conflicts committee, cash or our Class A shares at our election. Please read “Certain Relationships and Related Party Transactions—Exchange Agreement.”

Registration Rights Agreement.    We will enter into a registration rights agreement, or Registration Rights Agreement, with our Sponsors and certain of their respective affiliates under which each Sponsor and its affiliates will be entitled to demand registration rights, including the right to demand that a shelf registration statement be filed, and “piggyback” registration rights, for our Class A shares that it acquires. Please read “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

Equity Purchase Agreement.    We will enter into an equity purchase agreement, or Equity Purchase Agreement, with OpCo, under which we will use all of the net proceeds of this offering to purchase              of OpCo’s common units from OpCo. OpCo will use the funds it receives under the Equity Purchase Agreement to make distributions to our Sponsors and for general purposes, including to fund future acquisition opportunities. Please read “Certain Relationships and Related Party Transactions—Equity Purchase Agreement.”

Our Sponsors’ Joint Venture

In March 2015, First Solar and SunPower agreed to form, subject to certain closing conditions, Holdings as a joint venture to indirectly own, operate and acquire solar power generation assets. Holdings is the sole owner of our general partner and, upon the closing of this offering, will own all of the IDRs in OpCo. Through its ownership of our general partner, Holdings will have the right to appoint all of the board members and will cause our general partner’s board of directors to appoint certain officers of our general partner. In addition, Holdings will have certain approval rights over material decisions related to our and OpCo’s management. For a summary of such rights, please read “Prospectus Summary—Management.”

Our Sponsors have established an economic and governance structure that is intended to incentivize each of them to perform their respective obligations to the joint venture, including offering

 

 

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additional projects for acquisition or providing services to the joint venture. First Solar and SunPower each own a 50% economic interest and a 50% voting interest in Holdings, both of which may be subject to adjustment over time. Commencing December 1, 2019, each Sponsor’s relative economic interest in Holdings, the owner of our IDRs, will be subject to annual adjustment based on the relative performance of the projects such Sponsor contributes or sells to us, including any solar energy projects contributed or sold after the closing of this offering. Our Sponsors expect to coordinate offers of assets to us in a manner designed to enable us to achieve our targeted growth rate, which will be subject to ongoing adjustment by our Sponsors. Such contributions are designed to keep each Sponsor’s respective economic ownership in us largely equal over time. In addition, each Sponsor’s respective voting interests in Holdings will be subject to a one-time adjustment, giving one Sponsor primary control of the management of Holdings and us, in the event such Sponsor has sustained ownership of a substantial majority of the relative economic interest in Holdings for an agreed period. Please read “Certain Relationships and Related Party Transactions—Limited Liability Company Agreement of Holdings.”

Subject to oversight by the board of directors of our general partner, each Sponsor, through various O&M agreements and AMAs, will continue to operate and manage projects it contributes or sells to OpCo, except in circumstances where a project is already operated by an unaffiliated third party pursuant to an existing agreement. Please read “Certain Relationships and Related Party Transactions—O&M Agreements” and “Certain Relationships and Related Party Transactions—Asset Management Agreements.” In addition, our general partner’s board of directors will have a two-member project operations committee, consisting of one non-independent director appointed by First Solar and one non-independent director appointed by SunPower, that will be delegated the authority to make certain decisions related to the operation of our projects, including in respect of annual budgets, project financings, asset dispositions and certain other material transactions.

Implications of Being an Emerging Growth Company

As our predecessor had less than $1 billion in revenues during its last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified exemptions from reporting and other regulatory requirements that are otherwise applicable generally to public companies. These exemptions include:

 

    the initial presentation of two years of audited financial statements and two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in the registration statement of an initial public offering of common equity securities;

 

    exemption from the auditor attestation requirement on the effectiveness of our system of internal controls over financial reporting;

 

    delayed adoption of new or revised financial accounting standards; and

 

    reduced disclosure about our executive compensation arrangements.

We may take advantage of these provisions until we are no longer an emerging growth company, which will occur on the earliest of (i) the last day of the fiscal year following the fifth anniversary of this offering, (ii) the last day of the fiscal year in which we have more than $1 billion in annual revenues, (iii) the last day of the fiscal year in which we have more than $700 million in market value of our Class A shares held by non-affiliates as of the end of our fiscal second quarter or (iv) the date on which we have issued more than $1 billion of non-convertible debt over a three-year period.

 

 

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We have elected to take advantage of all of the applicable JOBS Act provisions, except that we have elected to opt out of the exemption that allows emerging growth companies to extend the transition period for complying with new or revised financial accounting standards, which election is irrevocable. Accordingly, the information that we provide you may be different than what you may receive from other public companies in which you hold equity interests.

Risk Factors

An investment in our Class A shares involves risks. For more information about these risks, please read “Risk Factors.” You should consider carefully these risk factors together with all of the other information included in this prospectus before you decide whether to invest in our Class A shares. These risks include, but are not limited to, the following:

Risks Related to Our Business

 

    OpCo may not have sufficient cash available for distribution following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements and fees to our general partner and its affiliates, to enable it to pay the minimum quarterly distribution on all its units, and therefore we may not have sufficient cash available for distribution to pay the initial quarterly distribution to our Class A shareholders.

 

    On a pro forma basis, we would not have had sufficient cash available for distribution to pay the full initial quarterly distribution on all of our Class A shares for the year ended December 28, 2014.

 

    We have a limited operating history and our projects may not perform as we expect.

 

    Initially, we will depend on certain projects in our Initial Portfolio, which have yet to achieve commercial operation, for a substantial portion of our anticipated cash flows.

Risks Related to Our Acquisition Strategy and Future Growth

 

    We may not be successful in implementing our growth strategy of making accretive acquisitions of additional solar energy projects.

 

    Our Sponsors’ failure to complete the development of the First Solar ROFO Projects and the SunPower ROFO Projects or project developers’, including our Sponsors’, failure to develop other solar energy projects, including those opportunities that are part of our Sponsors’ development pipeline, could have a significant effect on our ability to grow.

 

    Our inability to acquire additional solar energy projects due to our Sponsors’ decision to keep projects that they develop, competing bids from third parties for a solar energy project, our inability to agree on terms with the developer of a solar energy project, including our Sponsors, or our inability to arrange the required or desired financing for such acquisitions could have a significant effect on our ability to grow.

 

    Even if we consummate acquisitions that we believe will be accretive to cash available for distribution per Class A share, those acquisitions may decrease the cash available for distribution per Class A share as a result of incorrect assumptions in our evaluation of such acquisitions, unforeseen consequences or other external events beyond our control.

 

 

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Risks Related to Regulations

 

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

Risks Related to Our Project Agreements

 

    We rely on a limited number of offtake counterparties and we are exposed to the risk that they are unwilling or unable to fulfill their contractual obligations to us or that they otherwise terminate their offtake agreements with us.

 

    Certain of the offtake agreements in our Initial Portfolio and offtake agreements that we may enter into in the future contain or may contain provisions that allow the offtake counterparty to terminate the agreement or buyout all or a portion of the asset upon the occurrence of certain events. If these provisions are exercised and we are unable to enter into an offtake agreement on similar terms, in the case of a termination, or find suitable replacement assets to invest in, in the case of a buyout, our cash available for distribution could materially decline.

Risks Related to Our Financial Activities

 

    Our level of indebtedness or restrictions in the new credit facilities of OpCo could adversely affect our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

Risks Related to Our Relationship with Our Sponsors

 

    Since the economic and management rights of First Solar and SunPower are impacted by the performance of our business in different ways, First Solar and SunPower may fail to agree on our management, which could adversely affect our ability to execute our business plan.

 

    Our general partner and its affiliates, including our Sponsors, have conflicts of interest with us and limited duties to us and our Class A shareholders, and they may favor their own interests to the detriment of us and our Class A shareholders.

 

    Our Sponsors and other affiliates of our general partner are not restricted in their ability to compete with us.

Risks Related to this Offering and Ownership of Our Class A Shares

 

    Holders of our Class A shares have limited voting rights and are not entitled to elect our general partner or its directors.

 

    Our partnership agreement restricts the remedies available to holders of our Class A shares for actions taken by our general partner that might otherwise constitute breaches of fiduciary duties.

 

    Our partnership agreement replaces our general partner’s fiduciary duties to holders of our Class A shares with contractual standards governing its duties.

 

    Class A shareholders will experience immediate and substantial dilution in as adjusted net tangible book value of $             per Class A share.

 

 

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Risks Related to Taxation

 

    Our future tax liability may be greater than expected if we do not generate net operating losses, or NOLs, sufficient to offset taxable income or if tax authorities challenge certain of our tax positions.

 

    Our ability to use NOLs and NOL carryforwards to offset future income may be limited.

 

    Distributions to Class A shareholders may be taxable as dividends.

Formation Transactions

In March 2015, First Solar and SunPower entered into a master formation agreement to form a joint venture to indirectly own, operate and acquire solar energy systems. Such master formation agreement provided for the formation of Holdings, us, our general partner and OpCo.

Prior to the closing of this offering, the following transactions will occur:

 

    Holdings will issue to each of our Sponsors management and economic units representing 50% voting and economic ownership interest in Holdings;

 

    our general partner will issue 100% of its limited liability company interests to Holdings;

 

    we will issue a non-economic general partner interest to our general partner; and

 

    SunPower will contribute, in a series of transactions, to OpCo a 100% interest in each of the SunPower Project Entities, subject to tax equity structuring, which will reduce our economic ownership interest in most of the SunPower Project Entities, in exchange for 100% of the outstanding membership interests of OpCo.

Concurrently with the closing of this offering, the following transactions will occur:

 

    First Solar will contribute, in a series of transactions, to OpCo a 49% indirect economic interest in each of the Lost Hills Project, the North Star Project and the Solar Gen 2 Project, respectively;

 

    First Solar will contribute, in a series of transactions, to OpCo a 100% interest in the Maryland Solar Project Entity, and the Maryland Solar Project Entity will enter into a lease agreement with Maryland Solar Holdings, Inc., a subsidiary of First Solar, under which the Maryland Solar Project Entity will lease the Maryland Solar Project to Maryland Solar Holdings, Inc. for a term of six years;

 

    we will issue             of our Class A shares (or             Class A shares if the underwriters exercise their option to purchase additional Class A shares) to the public in this offering in exchange for net proceeds of approximately $             (or approximately $             if the underwriters exercise in full their operation to purchase additional Class A shares), after deducting the underwriting discount, the structuring fee and offering expenses;

 

    OpCo will enter into a new $             term loan under a term loan facility, which will become effective at the closing of this offering;

 

    OpCo will enter into a new $             revolving credit facility;

 

    under the Purchase Agreement with OpCo, we will use all of the net proceeds from this offering to purchase from OpCo             OpCo common units and OpCo will use a portion of these net proceeds for general purposes, including to fund future acquisition opportunities;

 

 

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    OpCo will use $             of the proceeds it receives from us and all of the proceeds from the term loan to make a distribution to SunPower and First Solar;

 

    we will issue to SunPower             Class B shares, representing a     % voting interest in us, and OpCo will issue to SunPower              OpCo common units and              OpCo subordinated units, representing a     % economic interest in OpCo;

 

    we will issue to First Solar             Class B shares, representing a     % voting interest in us, OpCo will issue to First Solar              OpCo common units and OpCo subordinated units, representing a     % economic interest in OpCo;

 

    OpCo will issue all of the incentive distribution rights to Holdings;

 

    we, our general partner and OpCo will enter into the Exchange Agreement with OpCo, First Solar and SunPower;

 

    we, our general partner, Holdings and OpCo will enter into the Management Services Agreements with each of our Sponsors;

 

    OpCo will enter into the ROFO Agreements with each of our Sponsors; and

 

    we, our general partner, Holdings and OpCo will enter into an Omnibus Agreement with our Sponsors.

In addition, we have granted the underwriters a 30-day option to purchase up to an aggregate of                  additional Class A shares. The number of OpCo common units to be issued to the Sponsors includes OpCo common units that will be issued at the expiration of the underwriters’ option to purchase additional Class A shares, assuming that the underwriters do not exercise the option. Any exercise of the underwriters’ option to purchase additional Class A shares would reduce the number of OpCo common units and Class B shares issued to the Sponsors by the number of Class A shares purchased by the underwriters in connection with such exercise. If and to the extent that the underwriters exercise their option to purchase additional Class A shares, the proceeds thereof will be used by us to purchase an equal number of common units of OpCo, and a number of additional OpCo common units and Class B shares equal to the number of Class A shares subject to the option not purchased by the underwriters will be issued to the Sponsors at the expiration of the option period for no additional consideration. OpCo will use the proceeds of any exercise of the underwriters’ option contributed to it to make an additional distribution to the Sponsors. All of the foregoing transactions shall collectively be referred to herein as the “Formation Transactions.”

 

 

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Organizational Structure After the Formation Transactions

The following diagram depicts our simplified organizational and ownership structure after giving effect to the Formation Transactions and this offering.

 

LOGO

 

 

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Management

8point3 General Partner, LLC, our general partner, will manage our business and operations. The board of directors and executive officers of our general partner will oversee our operations and make decisions on our behalf. Certain officers of our Sponsors also serve as executive officers or directors of our general partner. Through its ownership of our general partner, Holdings will cause our general partner’s board of directors to appoint a Chief Executive Officer selected by SunPower and a Chief Financial Officer selected by First Solar. Each such officer will serve a two-year term. Upon the completion of such term, First Solar will have the right to select our Chief Executive Officer for appointment by the board of directors of our general partner and SunPower will have the right to select the Chief Financial Officer for appointment by the board of directors of our general partner. The right to select these officers for appointment by the board of directors of our general partner will rotate between our Sponsors every two years, upon the expiration of such officer’s term. Neither First Solar nor SunPower is obligated to exercise its right to remove and replace such executive officers.

Unlike shareholders in a publicly traded corporation, our shareholders will not be entitled to elect our general partner or its directors. First Solar and SunPower will each have the right to designate two members of the board of directors of our general partner, with any additional members of our board of directors being designated collectively by First Solar and SunPower. At the closing of this offering, our general partner will have at least one director who is independent as defined under the independence standards established by the NASDAQ. Our Sponsors will appoint one additional independent director within 90 days of the date of this prospectus and a third independent director within 12 months of the date of this prospectus. For information about the executive officers and directors of our general partner, please read “Management.”

Summary of Conflicts of Interests and Duties

While we believe our relationship with our Sponsors and their subsidiaries is a significant competitive advantage, it is also a source of potential conflicts. As described above, our Sponsors or certain of their affiliates will provide certain services to us, including managing our day-to-day affairs and providing individuals to act as our general partner’s executive officers and directors. These executive officers may help our general partner’s board of directors evaluate potential acquisition opportunities presented by our Sponsors under the ROFO Agreements. In addition, our general partner has a duty to manage us in a manner it subjectively believes is in, or not adverse to, our best interests. However, our general partner’s executive officers and directors also have duties to manage our general partner in a manner beneficial to its owner, Holdings, which is owned by First Solar and SunPower. As a result, conflicts of interest may arise between us and our shareholders, on the one hand, and our Sponsors and our general partner, on the other hand. Delaware law provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties otherwise owed by a general partner to limited partners and the partnership. Our partnership agreement contains various provisions replacing the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing the duties of our general partner and the methods of resolving conflicts of interest. The effect of these provisions is to restrict the remedies available to our shareholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty. Our partnership agreement also provides that affiliates of our general partner, including our Sponsors and their other subsidiaries and affiliates, are permitted to compete with us. By purchasing a Class A share, an investor becomes bound by the provisions of our partnership agreement and each holder of our Class A shares is treated as having consented to various actions and potential conflicts of interest contemplated in our partnership agreement that might otherwise be considered a breach of fiduciary or other duties under Delaware state law. For a more

 

 

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detailed description of the potential conflicts of interest between us and our general partner and its affiliates, including our Sponsors, please read “Risk Factors—Risks Related to Our Relationship with Our Sponsors” and “Conflicts of Interest and Duties.”

Principal Executive Offices and Internet Address

Our principal executive offices are located at 77 Rio Robles, San Jose, California 95134, and our telephone number is (408) 240-5500. Our website is located at             and will be activated immediately following this offering. We expect to make available our periodic reports and other information filed with or furnished to the U.S. Securities and Exchange Commission, or the SEC, free of charge through our website as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference herein and does not constitute a part of this prospectus.

 

 

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The Offering

 

Class A shares offered to the public

             Class A shares.

 

               Class A shares if the underwriters exercise in full their option to purchase additional Class A shares from us.

 

Class B shares

First Solar will own              Class B shares, or              Class B shares if the underwriters exercise in full their option to purchase additional Class A shares from us.

 

  SunPower will own              Class B shares, or              Class B shares if the underwriters exercise in full their option to purchase additional Class A shares from us.

 

Option to purchase additional shares

We have granted the underwriters a 30-day option to purchase up to an additional              Class A shares.

 

Shares outstanding after this offering

             Class A shares (             Class A shares if the underwriters exercise in full their option to purchase additional Class A shares from us), which represents 100% of the economic limited partner interests in 8point3 Partners, and              Class B shares (             Class B shares if the underwriters exercise in full their option to purchase additional Class A shares from us).

 

Use of proceeds

We expect to receive approximately $             million of net proceeds from the sale of Class A shares offered hereby based upon the assumed initial public offering price of $             per Class A share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discount, the structuring fee and offering expenses.

 

 

We intend to use all of the net proceeds of this offering to purchase             OpCo common units from OpCo. OpCo intends to use (i) approximately $             million of such net proceeds to make a cash distribution to First Solar, (ii) approximately $             million of such net proceeds to make a cash distribution to SunPower and (iii) approximately $             million of such net proceeds for general purposes, including to fund future acquisition opportunities. If and to the extent that the underwriters exercise their option to purchase additional Class A shares, the proceeds thereof will be used by us to purchase a number of OpCo common units equal to the number of Class A shares purchased pursuant to

 

 

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the option. A number of additional OpCo common units and Class B shares equal to the number of Class A shares subject to the option not purchased by the underwriters will be issued to the Sponsors at the expiration of the option period for no additional consideration. OpCo will use the proceeds contributed to it to make an additional distribution to the Sponsors. Please read “Use of Proceeds.”

 

  After the application of the net proceeds from this offering, we will own a     % limited liability company interest in OpCo (or a     % limited liability company interest if the underwriters exercise in full their option to purchase additional Class A shares).

 

Cash distributions

We expect to pay an initial quarterly distribution of $             per Class A share, after incorporating the effects of the distribution forbearance described below, based on the fact that we will own the same number of OpCo common units as the number of our Class A shares outstanding and our expectation that OpCo will make a minimum quarterly distribution equal to $             per OpCo common and subordinated unit, to the extent it has sufficient cash after the establishment of cash reserves and the payment of expenses, including payments to our general partner and our Sponsors, in each case subject to various restrictions and other factors described in “Our Cash Distribution Policy and Restrictions on Distributions.” OpCo will pay all of our expenses, including the expenses we expect to incur as a result of being a publicly traded entity, other than U.S. federal income tax expense. We do not expect to be required to pay U.S. federal income tax for a period of      years. Please read “Risk Factors—Risks Related to Taxation—Our future tax liability may be greater than expected if we do not generate NOLs sufficient to offset taxable income or if tax authorities challenge certain of our tax positions.”

 

  We and OpCo will make quarterly distributions, if any, within 45 days after the end of each quarter, on or about the 15th day of each January, April, July and October to holders of record on or about the first day of each such month. For the fiscal quarter in which this offering closes, we intend to pay a prorated distribution on our Class A shares covering the period from the completion of this offering through                     , 2015, based on the actual length of that period.

 

 

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  The OpCo limited liability company agreement provides for distributions of available cash from operating surplus each quarter in the following manner:

 

    first, 100% to the holders of OpCo common units until each OpCo common unit has received a minimum quarterly distribution of $             plus any arrearages from prior quarters;

 

    second, 100% to the holders of OpCo subordinated units until each OpCo subordinated unit has received a minimum quarterly distribution of $             ; and

 

    third, 100% to all OpCo unitholders, pro rata, until each OpCo unit has received a distribution of $            .

 

  If cash distributions to the OpCo unitholders exceeds $             per OpCo unit in any quarter, Holdings will receive increasing percentages, up to 50%, of the cash OpCo distributes in excess of that amount. We refer to the right to these distributions as “incentive distribution rights” because they incentivize our Sponsors to increase distributions to the OpCo unitholders. In certain circumstances, Holdings, as the initial holder of the OpCo incentive distribution rights, has the right to reset the target distribution levels described above to higher levels based on OpCo cash distributions at the time of the exercise of this reset election. Please read “Provisions of Our Partnership Agreement and the OpCo Limited Liability Company Agreement Relating to Cash Distributions.”

 

  If we do not otherwise have sufficient available cash at the end of each quarter, we or OpCo may, but are under no obligation to, borrow funds to pay distributions to our Class A shareholders or OpCo’s unitholders. Neither we nor OpCo has a legal obligation to pay distributions at our initial quarterly distribution rate, the minimum quarterly distribution rate or at any other rate.

 

 

Under the OpCo limited liability company agreement, OpCo will reimburse our general partner and its affiliates, including our Sponsors, for costs and expenses they incur and payments they make on our behalf. Pursuant to the Management Services Agreements, we will pay an aggregate annual fee of $             million to our Sponsors for general and administrative, or G&A

 

 

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services. In addition, we expect to incur $             million of incremental G&A expense annually as a result of being a publicly traded limited partnership. OpCo will make each of these payments prior to OpCo making any distributions on its common and subordinated units. Please read “Certain Relationships and Related Party Transactions—Master Formation Agreement.”

 

  The amount of cash available for distribution OpCo must generate to support the payment of the minimum quarterly distribution on OpCo’s common and subordinated units and the initial quarterly distribution on our Class A shares, in each case to be outstanding immediately after this offering, for four quarters is approximately $             million (or approximately $             million per quarter).

 

  If we had completed the Formation Transactions, including this offering, on December 30, 2013, OpCo’s unaudited pro forma cash available for distribution for the twelve months ended December 28, 2014 would have been approximately $             million. This amount would have only been sufficient for OpCo to pay a cash distribution of $             per OpCo common unit per quarter ($             per OpCo common unit on an annualized basis), or approximately     % of OpCo’s minimum quarterly distribution, on all of OpCo’s common units for such period and no distribution on OpCo’s subordinated units, and would have only been sufficient for us to pay a cash distribution of $             per unit per quarter ($             per unit on an annualized basis), or approximately     % of our initial quarterly distribution, on all of our Class A shares for such period.

 

 

We believe, based on our financial forecast and related assumptions included in “Our Cash Distribution Policy and Restrictions on Distributions—Estimated Cash Available for Distribution for the twelve-month periods ending August 31, 2016 and August 31, 2017,” and after incorporating the effects of the distribution forbearance described below, we, including OpCo, will have sufficient cash available for distribution to make cash distributions for (i) the twelve months ending August 31, 2016 (or $             per Class A share on an annualized basis) and (ii) the twelve months ending

 

 

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August 31, 2017 (or $             per Class A share on an annualized basis) on all of our Class A shares to be outstanding immediately after this offering. Our actual results of operations, cash flows and financial condition during the forecast period may vary from the forecast, and there is no guarantee that we will make quarterly cash distributions to our Class A shareholders at the initial quarterly distribution rate or at all. Please read “Our Cash Distribution Policy and Restrictions on Distributions.”

 

Distribution forbearance provisions

Our Sponsors have agreed to forego any distributions declared on their common and subordinated units of OpCo during the forbearance period. The amount of distributions to be foregone by the Sponsors, assuming OpCo distributes the minimum quarterly distribution per unit, will be $             million per fiscal quarter (or $             million if the underwriters exercise their option to purchase additional units in full). The purpose of this forbearance is to reduce the risk that the holders of Class A shares will not receive the full initial quarterly distribution as a result of certain solar energy projects not reaching COD until after the closing of the offering. The “forbearance period” will end in the fiscal quarter commencing on or after March 1, 2016 that the board of directors of our general partner, with the concurrence of the conflicts committee, determines that OpCo will be able to earn and pay at least the minimum quarterly distribution on each of its outstanding common and subordinated units for such quarter and the successive quarter.

 

OpCo subordinated units

Our Sponsors will initially own all of the OpCo subordinated units. The principal difference between the OpCo common and subordinated units is that for any quarter during the subordination period, the OpCo subordinated units will not be entitled to receive any distribution of available cash from operating surplus until the OpCo common units have received the minimum quarterly distribution from operating surplus for such quarter plus any arrearages in the payment of the minimum quarterly distribution from operating surplus from prior quarters. OpCo subordinated units will not accrue arrearages nor will OpCo common units held by our Sponsors with respect to the forbearance period. During the

 

 

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forbearance period, our Sponsors’ common and subordinated units in OpCo will not be treated as outstanding for purposes of calculating the earn and pay tests that determine the duration of the subordination period and that are described in “Provisions of our Partnership Agreement and the OpCo Limited Liability Company Agreement Relating to Cash Distributions—Provisions of the OpCo Limited Liability Company Agreement Relating to Cash Distributions—Subordination Period.”

 

Conversion of OpCo subordinated units

The subordination period will end on the first business day after we have earned and paid an aggregate amount of at least $             (the minimum quarterly distribution on an annualized basis) multiplied by the total number of outstanding common and subordinated units for each of three consecutive, non-overlapping four-quarter periods ending on or after             , 2018 and there are no outstanding arrearages on our common units.

 

  Notwithstanding the foregoing, the subordination period will end on the first business day after we have paid an aggregate amount of at least $             (150.0% of the minimum quarterly distribution on an annualized basis) multiplied by the total number of outstanding common and subordinated units and we have earned that amount plus the related distribution on the incentive distribution rights, for any four-quarter period ending on or after                     , 2016 and there are no outstanding arrearages on our common units.

 

  When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units will thereafter no longer be entitled to arrearages.

 

Issuance of additional shares

Our partnership agreement authorizes us to issue an unlimited number of additional Class A shares and other partnership interests without the approval of our shareholders. Our shareholders will not have preemptive or participation rights to purchase their pro rata share of any additional shares issued. Please read “Shares Eligible for Future Sale” and “Material Provisions of the 8point3 Partners Partnership Agreement—Issuance of Additional Partnership Interests.”

 

 

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Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our shareholders will have only limited voting rights on matters affecting our business. Our shareholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 66 2/3% of the outstanding shares, including any shares owned by our general partner and its affiliates, voting together as a single class. In addition, any vote to remove our general partner during the subordination period must provide for the election of a successor general partner by the holders of a majority of the Class A shares and a majority of the Class B shares, voting as separate classes. Upon the closing of this offering, our Sponsors will own Class B shares equal to an aggregate of     % of our Class A and Class B shares. This will give our Sponsors the ability to prevent the removal of our general partner. Please read “Material Provisions of the 8point3 Partners Partnership Agreement—Meetings; Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 80% of the aggregate of the number of Class A shares outstanding and the number of Class B shares equal to the number of OpCo common units owned by the general partner and its affiliates, our general partner will have the right, at its option, which it may assign in whole or in part to us or an affiliate, to purchase all, but not less than all, of the remaining Class A shares at a price not less than the then-current market price of the Class A shares, as calculated in accordance with our partnership agreement.

 

Certain U.S. federal income tax consequences

Even though we are organized as a limited partnership under state law, we will be treated as a corporation for U.S. federal income tax purposes. Accordingly, we will be subject to U.S. federal income tax at regular corporate rates on our net taxable income. We expect to generate NOLs that we can use to offset future taxable income. As a result, we do not expect to pay meaningful U.S. federal income tax for a period of approximately              years. This estimate is based upon assumptions we have made

 

 

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regarding, among other things, OpCo’s income, capital expenditures, cash flows, net working capital and cash distributions. For a discussion of U.S. federal and estate tax consequences to non-U.S. holders, please read “Risk Factors—Risks Related to Taxation—Our future tax liability may be greater than expected if we do not generate NOLs sufficient to offset taxable income or if tax authorities challenge certain of our tax positions” and “Certain U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders.”

 

Exchange listing

We intend to apply to list our Class A shares on the NASDAQ Global Market, or the NASDAQ, under the symbol “            .”

 

 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

The following table sets forth summary combined carve-out financial data of our predecessor and summary pro forma financial data of 8point3 Energy Partners LP as of and for the periods indicated. The combined carve-out financial statements of our predecessor as of and for the years ended December 28, 2014 and December 29, 2013, appearing elsewhere in this prospectus were prepared on a “carve-out” basis which comprises contracted solar energy projects and leased solar energy systems that have historically been owned by SunPower. The predecessor is not an existing stand-alone legal entity; rather it is a combination of currently operating leased solar energy systems and solar energy projects currently under construction that have long-term offtake agreements, all of which are currently owned by SunPower. The combined carve-out financial statements are intended to represent the financial results during those periods of SunPower’s contracted solar energy projects and leased solar energy systems in the United States that will be contributed to OpCo as part of the Formation Transactions. The following summary historical combined carve-out financial and operating data presents all of the projects and operations of our predecessor.

Upon the completion of this offering, we will own a controlling non-economic managing member interest in OpCo, and a     % limited liability company interest in OpCo (assuming no exercise of the underwriters’ option to purchase additional Class A shares) and our Sponsors will collectively own a non-controlling     % limited liability company interest in OpCo (assuming no exercise of the underwriters’ option to purchase additional Class A shares). However, as required by U.S. GAAP, we will continue to consolidate 100% of the assets and operations of OpCo in our financial statements and reflect a non-controlling interest.

The summary unaudited pro forma financial data has been derived by the application of pro forma adjustments to the historical combined carve-out financial statements of our predecessor included elsewhere in this prospectus. The pro forma balance sheet assumes that the Formation Transactions and this offering occurred as of December 28, 2014 and the pro forma statements of operations data for the year ended December 28, 2014 assume that the Formation Transactions and this offering, with respect to share and per share information, occurred as of December 30, 2013.

The unaudited pro forma condensed combined financial statements reflect the following significant assumptions and Formation Transactions related to this offering:

 

    the contribution by First Solar of the First Solar Project Entities in exchange for an aggregate of              Class B shares,              OpCo common units,              OpCo subordinated units and the right to receive a portion of the proceeds of this offering;

 

    the issuance by us of             Class A shares in this offering for net proceeds of $            ;

 

    the use by us of all of the net proceeds of this offering to purchase from OpCo             OpCo common units, resulting in our owning a     % interest in OpCo;

 

    the issuance by us of an aggregate of             Class B shares and the issuance by OpCo of an aggregate of             OpCo common units and             OpCo subordinated units to SunPower in connection with the reorganization of OpCo;

 

    the issuance by OpCo of all of the incentive distribution rights to Holdings;

 

    the use by OpCo of the proceeds it receives from us to make a distribution to First Solar of $            and to make a distribution to SunPower of $            , with the remaining proceeds OpCo receives from us to be used for general purposes, including to fund future acquisition opportunities;

 

 

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    the incurrence of a $            term loan by OpCo under a term loan facility and the distribution of the proceeds thereof to the Sponsors; and

 

    the entrance into a $             million revolving credit facility by OpCo.

The pro forma financial data does not give effect to the estimated $             million in incremental annual G&A expense we expect to incur as a result of being a publicly traded company.

The combined carve-out financial statements of our predecessor, from which the summary unaudited pro forma financial data have been derived, are presented in U.S. dollars and have been prepared in accordance with U.S. GAAP.

8point3 Partners has not yet commenced operations and has no significant assets or liabilities.

The following table should be read together with, and is qualified in its entirety by reference to, the combined carve-out financial statements and the accompanying notes included elsewhere in this prospectus. Among other things, the combined carve-out financial statements include more detailed information regarding the basis of presentation for the information in the following table. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. Our summary unaudited pro forma financial information does not purport to represent what our results of operations or financial position would have been if we operated as a publicly traded partnership during the period presented and may not be indicative of our future performance.

 

     Pro Forma
As Adjusted
     Historical  

(In thousands)

   Year Ended
December 28,
2014
     Year Ended
December 28,
2014
    Year Ended
December 29,
2013
 

Statement of Operations Data:

       

Revenues:

       

Operating revenues

   $                   $ 9,231      $ 24,489   
  

 

 

    

 

 

   

 

 

 

Total revenues

  9,231      24,489   

Operating costs and expenses:

Cost of operations

  (3,195   13,111   

Cost of operations-parent

  937      928   

Selling, general and administrative

  4,818      4,272   

Depreciation, amortization and accretion

  2,339      3,224   
  

 

 

    

 

 

   

 

 

 

Total operating costs and expenses

  4,899      21,535   
  

 

 

    

 

 

   

 

 

 

Operating income (loss)

  4,332      2,954   

Interest expense

  5,525      6,751   
  

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

  (1,193   (3,797

Benefit from (provision for) income taxes

  (23   (30
  

 

 

    

 

 

   

 

 

 

Net income (loss)

  (1,216   (3,827

Less net income (loss) attributable to noncontrolling interests

         
  

 

 

    

 

 

   

 

 

 

Net income (loss) attributable to 8point3 Partners

$     $ (1,216 ) $ (3,827 )
  

 

 

    

 

 

   

 

 

 

Basic net income per share

$    
  

 

 

      

 

 

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     Pro Forma
As Adjusted
     Historical  

(In thousands)

   Year Ended
December 28,
2014
     Year Ended
December 28,
2014
    Year Ended
December 29,
2013
 

Balance Sheet Data (at period end):

       

Property and equipment, net

   $        $ 158,208      $ 100,010   

Total assets

   $        $ 247,969      $ 200,565   

Long-term debt and financing obligations

   $        $ 91,183      $ 31,545   

Total equity

   $        $ 127,510      $ 139,933   

Cash Flow Data:

       

Net cash provided by (used in)

       

Operating activities

      $ 10,476      $ 5,380   

Investing activities

      $ (63,906   $ (8,082

Financing activities

      $ 53,430      $ 2,702   

Other Financial Data:

       

EBITDA(1)

   $         $ 6,671      $ 6,178   

 

(1) For a discussion of the non-U.S. GAAP financial measures EBITDA, please read “—Non-U.S. GAAP Financial Measures.”

Non-U.S. GAAP Financial Measures

EBITDA

We define EBITDA as net income plus interest expense, income tax expense, depreciation and amortization. EBITDA is a non-U.S. GAAP financial measure. This measurement is not recognized in accordance with U.S. GAAP and should not be viewed as an alternative to U.S. GAAP measures of performance. The U.S. GAAP measure most directly comparable to EBITDA is net income. The presentation of EBITDA should not be construed as an implication that our future results will be unaffected by unusual or non-recurring items. We believe EBITDA is useful to investors in evaluating our operating performance because:

 

    securities analysts and other interested parties use such calculations as a measure of financial performance and borrowers’ ability to service debt;

 

    it is used by our management for internal planning purposes, including certain aspects of our consolidated operating budget and capital expenditures; and

 

    it is used by investors to assess the ability of our assets to generate sufficient cash flows to make distributions to our Class A shareholders.

EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations include:

 

    it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    it does not reflect changes in, or cash requirements for, working capital;

 

    it does not reflect significant interest expense or the cash requirements necessary to service interest or principal payments on our outstanding debt or cash distributions on tax equity;

 

    it does not reflect payments made or future requirements for income taxes;

 

    although it reflects adjustments for factors that we do not consider indicative of future performance, we may, in the future, incur expenses similar to the adjustments reflected in our calculation of EBITDA in this prospectus; and

 

 

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    although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA does not reflect cash requirements for such replacements.

Investors are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis.

The following table presents a reconciliation of net income to EBITDA, on a historical basis and pro forma basis, as applicable, for each of the periods indicated.

 

     Pro Forma      Historical  

(In thousands)

   Year Ended
December 28,
2014
     Year Ended
December 28,
2014
    Year Ended
December 29,
2013
 

Net income (loss)

   $                   $ (1,216   $ (3,827

Add (Less):

       

Interest expense

        5,525        6,751   

Income tax expense

        23        30   

Depreciation

        2,339        3,224   
  

 

 

    

 

 

   

 

 

 

EBITDA

$     $ 6,671    $ 6,178   
  

 

 

    

 

 

   

 

 

 

 

 

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RISK FACTORS

Investing in our Class A shares involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before deciding to invest in our Class A shares. Interests in a limited partnership are inherently different from shares of capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business and we will be treated as a corporation for U.S. federal income tax purposes. If any of the following risks were to occur, they may materially harm our business, financial condition and results of operations and our ability to make cash distributions to our shareholders could be materially and adversely affected. In that case, we might not be able to pay distributions on our Class A shares, the trading price of our Class  A shares could decline, and you could lose all or part of your investment in us.

Risks Related to Our Business

OpCo may not have sufficient cash available for distribution following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements and fees to our general partner and its affiliates, to enable it to pay the minimum quarterly distribution on all its units, and therefore we may not have sufficient cash available for distribution to pay the initial quarterly distribution to our Class A shareholders.

In order for OpCo to pay the minimum quarterly distribution of $             per unit, or $             per unit on an annualized basis, and for us to pay the initial quarterly distribution (assuming we are not required to pay federal income taxes), OpCo will require cash available for distribution of approximately $             million per quarter, or $             million per year, based on the number of OpCo common and subordinated units to be outstanding immediately after completion of this offering. OpCo may not have sufficient available cash each quarter to pay the minimum quarterly distribution or any amount to its unitholders and therefore we may not have sufficient available cash to pay the initial quarterly distribution or any amount to our Class A shareholders.

The amount of cash that OpCo can distribute to its unitholders, including us, each quarter principally depends upon the amount of cash its subsidiaries generate from their operations, which will fluctuate from quarter to quarter based on, among other things:

 

    the amount of revenue generated from the projects in which OpCo’s subsidiaries have an interest;

 

    the level of OpCo’s and its subsidiaries’ O&M and G&A costs;

 

    the ability of OpCo to acquire additional projects; and

 

    if OpCo acquires a project prior to its COD, timely completion of the project and the achievement of COD at expected capacity of the project.

In addition, the amount of cash that OpCo will have available for distribution will depend on other factors, some of which are beyond its control, including:

 

    availability of borrowings under its credit facility to pay distributions;

 

    debt service requirements and other liabilities, including state or local taxes we may be required to pay;

 

    the costs of acquisitions, if any;

 

    fluctuations in its working capital needs;

 

    timing and collectability of receivables;

 

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    restrictions on distributions contained in existing or future debt agreements;

 

    prevailing economic conditions;

 

    access to credit or capital markets; and

 

    the amount of cash reserves established by our general partner for the proper conduct of OpCo’s business.

Please read the other risks set forth in “—Risks Related to Our Business” for a discussion of risks affecting OpCo’s ability to generate cash available for distribution.

On a pro forma basis, we would not have had sufficient cash available for distribution to pay the full initial quarterly distribution on all of our Class A shares for the year ended December 28, 2014.

On a pro forma basis, assuming we had completed this offering and related transactions as of January 1, 2014, OpCo’s cash available for distribution would have been $         million for the year ended December 28, 2014, which would have allowed it to pay only     % of the minimum quarterly distribution of $         per unit ($         per unit on an annualized basis) on the OpCo common units and no distribution on the OpCo subordinated units, and which would have allowed us to pay     % of the initial quarterly distribution of $         per share on the Class A shares, in each case giving no effect to the distribution forbearance. For a calculation of our ability to make cash distributions to our Class A shareholders based on our pro forma results, please read “Our Cash Distribution Policy and Restrictions on Distributions.”

The assumptions underlying the forecast of cash available for distribution that we include in “Our Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, operational, construction-related, regulatory and competitive risks and uncertainties that could cause our actual cash available for distribution to differ materially from our forecast.

The forecast of cash available for distribution set forth under “Our Cash Distribution Policy and Restrictions on Distributions” includes our forecasted results of operations, EBITDA and cash available for distribution for the twelve-month period ending August 31, 2016 and the twelve-month period ending August 31, 2017. We estimate that OpCo’s total cash available for distribution for the twelve-month period ending August 31, 2016, will be approximately $         million, and for the twelve-month period ending August 31, 2017, will be approximately $         million as compared to approximately $         million for year ended December 28, 2014, on a pro forma basis. The forecasted amount for the twelve-month period ending                     , 2016 would not be sufficient for us to pay the full initial quarterly distribution in the absence of the distribution forbearance, which will be at least $            million during this period. Most of the expected increase in cash available for distribution is attributable to increased revenues from the commencement of commercial operations at the Quinto Project and a full year of operations for the Solar Gen 2 Project during the forecast period. Other key assumptions include the future operating costs of our facilities, our facilities’ future level of power generation, interest rates, the level of our G&A and O&M expenses, tax treatment of income and the absence of material adverse changes in economic conditions or government regulations. The forecast only includes projects in our Initial Portfolio.

Furthermore, our statement that we have established a three-year targeted annual growth rate in our cash available for distribution of 12% to 15% per OpCo common unit is based on our Sponsors’ stated intention to us that they plan to offer us sufficient First Solar ROFO Projects and SunPower ROFO Projects, respectively, each year to produce such an increase. While we believe our targeted growth rate is reasonable, it is based on estimates and assumptions regarding a number of factors, many of which are beyond our control, including the timing of future acquisitions, the purchase price we

 

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pay for acquired projects, the performance of the acquired projects, our ability to access the capital markets and our borrowing capacity, the financing costs associated with acquisitions, and the fees charged by our Sponsors or third parties for managing the acquired assets, and we may not be able to expand our business at a rate consistent with our expectations, if at all. Neither First Solar nor SunPower is obligated to make available to us the First Solar ROFO Projects or the SunPower ROFO Projects, respectively, on an accretive basis or at all, and even if they make available to us such opportunities, we may not be able to consummate an acquisition or such acquisition may not be as accretive as expected. To the extent our projected growth is not achieved, our revenues, and therefore our cash available for distribution, will be adversely affected.

The financial forecast has been prepared by management, and we have not received an opinion or report on it from our or any other independent auditor. The financial forecast is based on a P50 production level, or the level of energy production that we estimate our Initial Portfolio will meet or exceed 50% of the time. The other assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, financial, operational, construction-related, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted. If we do not achieve the forecasted results, we may not be able to pay the full minimum quarterly distribution or any amount on our Class A shares, in which event the market price of our common units may decline materially.

The amount of cash we have available for distribution to holders of our Class A shares depends primarily on our cash flow and not solely on profitability, which may prevent us from making cash distributions during periods when we record net income.

The amount of cash that OpCo has available for distribution depends primarily upon its cash flow, including cash flow from financial reserves and working capital borrowings, and is not solely a function of profitability, which will be affected by non-cash items. As a result, even when OpCo records net losses in a period, it may be able to make cash distributions and may not be able to make cash distributions during periods when it records net income.

Since a substantial portion of our Initial Portfolio is still under construction, we are subject to risk until such projects achieve COD.

A substantial portion of our Initial Portfolio will still be under construction when we acquire it. Our forecast assumes certain CODs and capacities for the projects and if one or more of the projects do not attain COD when expected or at all or if the capacity of one or more projects is less than expected, such project(s) could generate substantially less cash flow than expected. The Sponsors have agreed under the Omnibus Agreement to pay to us all costs required to complete such project and certain liquidated damages in the event such project fails to achieve COD and specified capacities pursuant to an agreed schedule. In certain circumstances, our Sponsors’ payment of liquidated damages will result in such Sponsor’s repurchase of the underperforming project. We will not be generating cash flow until we can redeploy the proceeds from the liquidated damages, and we may not ultimately find a replacement project or projects that produce the same amount of cash flow as the underperforming project or projects were expected to produce. For a discussion of other construction related risks, please read “—Risks Related to Our Acquisition Strategy and Future Growth—If we choose to acquire solar energy projects before COD in the future, we will be subject to risks associated with the acquisition of solar energy projects that remain under construction, which could result in our inability to complete construction projects on time or at all, and make solar energy projects too expensive to complete or cause the return on an investment to be less than expected.”

We have a limited operating history and our projects may not perform as we expect.

The majority of projects in our Initial Portfolio are relatively new or have yet to begin operations. Four of our utility projects and two of our C&I projects are in the final stages of construction, two of our

 

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utility projects and approximately 85% of our Residential Portfolio attained COD within the last two years and all of our Residential Portfolio attained COD within the last four years. In addition, we expect that many of the projects that we may acquire, including the First Solar ROFO Projects and SunPower ROFO Projects, will either not have commenced operations, have recently commenced operations or otherwise have a limited operating history at the time of acquisition. As a result, our 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 our ability to accurately estimate our results of operations, financial condition and liquidity. The ability of our projects to perform as we expect will also be subject to risks inherent in newly constructed solar energy projects, including equipment and system performance below our expectations, equipment and system failures and outages. The failure of some or all of our projects to perform according to our expectations could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

Energy projects involve significant risks that could result in a business interruption or partial or complete shutdown for which we may not be adequately insured.

There are risks associated with the ownership and operation of our projects. These risks include:

 

    breakdown or failure of solar modules, inverters, transformers and other equipment that are not covered by warranty or insurance;

 

    catastrophic events, such as fires, earthquakes, severe weather, tornadoes, ice or hail storms or other meteorological conditions, landslides and other similar events beyond our control, which could severely damage or destroy a project, reduce its energy output or result in personal injury, loss of life or property damage;

 

    technical performance below expected levels, including the failure of solar modules and other equipment to produce energy as expected due to incorrect measures of performance provided by equipment suppliers;

 

    increases in the cost of operating the projects, including costs relating to labor, equipment, insurance, permit compliance and real estate taxes;

 

    operator, contractor or equipment provider error or failure to perform;

 

    serial design or manufacturing defects, which may not be covered by warranty or insurance;

 

    certain unremediated events under project contracts that may give rise to a termination right of the contract 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 or project contracts;

 

    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 owners of land on which our projects are located or adjacent landowners;

 

    changes in law, including changes in governmental permit requirements;

 

    terrorist attacks, cyber-attacks, theft, vandalism and other intentionally harmful acts;

 

    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.

 

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Any of the risks described above could significantly decrease or eliminate the revenues of a project, significantly increase its operating costs, cause OpCo or its subsidiaries to default under their respective credit facilities or other financing agreements or give rise to damages or penalties owed by us to a 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 our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

Initially, we will depend on certain projects in our Initial Portfolio, which have yet to achieve commercial operation, for a substantial portion of our anticipated cash flows.

Initially, we will depend on certain projects in our Initial Portfolio, one of which has yet to achieve commercial operation, for a substantial portion of our anticipated cash flows. For example, we expect our largest projects, the Quinto Project, which has yet to achieve commercial operation, and the Solar Gen 2 Project, to account for between approximately     % and     % of the net generation of our Initial Portfolio and between approximately     % and     % of our EBITDA for the twelve-month periods ending                     , 2016 and                     , 2017, respectively, assuming no acquisitions of ROFO Projects or other projects. We may not be able to successfully execute our acquisition strategy in order to further diversify our sources of cash flow and reduce our portfolio concentration. Consequently, the impairment or loss of any one or more of the projects in our Initial Portfolio, such as the Quinto Project or the Solar Gen 2 Project, would materially and disproportionately reduce our total energy generation and cash flows and, as a result, have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

Our business is concentrated in certain markets, putting us at risk of region specific disruptions.

Of the 432 MW in our Initial Portfolio, a total of 396 MW were located in California, including approximately 95% of the MW of our utility projects and 72% of the MW of our DG Solar projects, and we expect much of our near-term future growth to occur in California, further concentrating our customer base and operational infrastructure. Accordingly, our business and results of operations are particularly susceptible to adverse economic, regulatory, political, weather and other conditions in this market and in other markets where we become similarly concentrated. Any of these conditions could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders. In addition, 100% of our Initial Portfolio is located in the United States, which makes us particularly susceptible to adverse changes in U.S. tax laws. Please read “—Risks Related to Taxation—Our future tax liability may be greater than expected if we do not generate NOLs sufficient to offset taxable income or if tax authorities challenge certain of our tax positions.”

Warranties provided by the suppliers of equipment for our assets and maintenance obligations of the operators of our assets may be limited by the ability of a supplier and/or operator to satisfy its warranty or performance obligations or by the expiration of applicable time or liability limits, which could reduce or void the warranty protections, or may be limited in scope or magnitude of liabilities, and thus the warranties and maintenance obligations may be inadequate to protect us.

Our Sponsors are a significant source of our warranty and maintenance coverage under a number of related party agreements, including EPC agreements, O&M agreements and warranty agreements, including product quality and performance warranties. Certain of these warranties are also provided by other sources, including the suppliers of equipment for our assets, among others. In the event that such warranty providers or operators, including our Sponsors, file for bankruptcy, cease operations or otherwise become unable or unwilling to fulfill their warranty obligations, we may not be

 

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adequately protected by such warranties. Even if such warranty providers or operators fulfill their obligations, the warranty or maintenance obligations may not be sufficient to protect us against losses. In addition, these warranties have a term of at least one year, in the case of certain system warranties provided by EPC providers, to 25 years, in the case of manufacturer module warranties, after the date each equipment item is delivered or commissioned. These warranties are subject to liability and other limits. If we seek warranty protection and a warranty provider is unable or unwilling to perform its warranty obligations, or if an operator is unable or unwilling to perform its maintenance obligations, whether as a result of its financial condition or otherwise, or if the term of the warranty or maintenance obligation has expired or a liability limit has been reached, there may be a reduction or loss of protection for the affected assets, which could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to our Class A shareholders.

We rely on interconnection and transmission facilities of third parties to deliver energy from our utility projects. If these facilities become unavailable, our projects may not be able to operate or deliver energy.

We depend on interconnection and transmission facilities owned and operated by third parties to deliver the energy from our utility projects. Many of the interconnection and transmission arrangements for the utility projects in our 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 and other events beyond our control could partially or completely curtail deliveries of energy by our utility projects and increase project costs. In addition, any termination of a utility project’s interconnection or transmission arrangements or non-compliance by an interconnection provider or another third party with its obligations under an interconnection or transmission arrangement may delay or prevent our projects from delivering energy to our contractual counterparties. If the interconnection or transmission arrangement for a utility project is terminated, we may not be able to replace it on similar terms to the existing arrangement, or at all, or we may experience significant delays or costs in connection with such replacement. Moreover, if we acquire any utility 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 or transmission could adversely affect the operation of our utility projects and the revenues received, which could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

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

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

 

    the protection of wildlife;

 

    the presence or discovery of archaeological, religious or cultural resources at or near our operations; and

 

    the protection of workers’ health and safety.

If our projects do not comply with such laws, regulations or requirements, we 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 and threatened or endangered species, may also result in criminal sanctions or injunctions.

 

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Our 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, our projects could malfunction or experience other unplanned events resulting in personal injury, fines or property damage. Our projects may be constructed and operated on properties that have preexisting releases of hazardous substances or other preexisting environmental conditions that carry health and safety risks, including the potential for related civil litigation, regulatory compliance, remediation orders, fines and other penalties, regardless of whether we knew of or exacerbated the preexisting release or preexisting condition.

Additionally, we may be held liable for related investigatory 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 we knew of or caused the release or potential release. We 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 our projects, regardless of whether we own or lease the sited property, or the inability to remove or otherwise remediate such substances may restrict or eliminate our ability to operate our projects.

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

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

We do not control certain of the entities that own our projects and we may acquire future projects that we do not control.

A subsidiary of Southern Company owns a 51% economic interest in, and, upon the closing of this offering, we will own a 49% economic interest in, the Solar Gen 2 Project Entity. We expect that other projects in our Initial Portfolio, including Lost Hills and North Star, will be subject to a similar structure where we do not own a majority of ownership of the project entity or control the project entity’s governing board. As a result, our ability to make distributions to our Class A shareholders will depend in large part on the performance of these entities and their distribution of cash to us. Specifically,

 

    we may have limited ability to control decisions with respect to the operations of these entities and their subsidiaries, including decisions with respect to incurrence of expenses and distributions to us and to project contract compliance and enforcement of counterparty obligations under such project contracts;

 

    these entities may establish reserves for working capital, capital projects, environmental matters and legal proceedings which would otherwise reduce cash available for distribution to us;

 

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    these entities may incur additional indebtedness, and principal and interest made on such indebtedness may reduce cash otherwise available for distribution to us;

 

    the terms of indebtedness of these entities may limit their ability to distribute cash to us;

 

    these entities may require us to make additional capital contributions to fund working capital and capital expenditures, our funding of which could reduce the amount of cash otherwise available for distribution; and

 

    we may not be the operators of these entities’ projects.

Further, additional solar energy projects we may acquire may be subject to a similar structure where we do not own a majority of the project entity and we may invest in joint ventures in which we share control or in which we are a minority investor. In these instances, the majority investor or controlling investor may not have the level of experience, technical expertise, human resources management and other attributes necessary to operate these assets optimally.

Any of these items could significantly and adversely impact our ability to distribute cash to our Class A shareholders. For a more complete description of the agreements governing the management and operation of the entities in our Initial Portfolio in which we own an interest, please read “Certain Relationships and Related Party Transactions.”

We expect to be dependent on tax equity financing arrangements, which may not be available in the future.

We intend to acquire projects in the future that utilize tax equity financing to monetize tax benefits available to certain renewable energy assets. However, no assurance can be given that tax equity investors will be available or willing to invest on acceptable terms at the time of any such acquisition or that the tax incentives and benefits that are needed to make tax equity financing available will remain in place. Tax equity investors have invested in and provided a significant amount of the permanent capital needed for the U.S. assets in our Initial Portfolio and we expect to have similar arrangements for assets we acquire in the future, including the ROFO Projects. In a typical tax equity financing, a tax equity investor makes a capital investment in a class of equity interests of the entity that directly or indirectly owns the physical asset or assets. However, the availability of tax equity financing depends on federal tax incentives that encourage renewable energy development. These attributes primarily include (i) ITCs, which are federal income tax credits equal to 30% multiplied by the cost of eligible assets (10% multiplied by the cost of eligible assets placed in service after December 31, 2016) and (ii) accelerated depreciation of renewable energy assets as calculated under the current tax depreciation system, the modified accelerated cost recovery system of the U.S. Internal Revenue Code of 1986, as amended. No assurance can be given that the federal government will maintain these incentive programs. The reduction or loss of these tax benefits could cause a material adverse effect on the willingness of investors to provide tax equity financing for a portion of the acquisition price of U.S. renewable energy assets, which in turn could increase our cost of capital and affect our ability to make distributions.

Our tax equity financing agreements provide, and tax equity financing arrangements we enter into in the future may provide, our tax equity investors with a number of minority investor protection rights with respect to the applicable asset or assets that have been financed with tax equity, including restricting the ability of the entity that owns such asset or assets to incur debt. To the extent we want to incur project-level debt at a project in which we co-invest with a tax equity investor, we may be required

 

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to obtain the tax equity investor’s consent prior to such incurrence. In addition, the amount of debt that could be incurred by an entity in which we have a tax equity co-investor may be further constrained because even if the tax equity investor consents to the incurrence of the debt at the entity or project level, the tax equity investor may not agree to pledge its interest in the project which could reduce the amount that can be borrowed by the entity.

Further, there are a limited number of potential tax equity investors. Such investors have limited funds and renewable energy developers, operators and investors compete against one another and with others for tax equity financing for their capital. Our business strategy depends on the availability of tax equity financing to acquire additional assets to be able to meet our expected distribution rate. Therefore, our inability to enter into tax equity financing agreements with attractive pricing terms, or at all, could have a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, as the renewable energy industry expands, the cost of tax equity financing may increase and there may not be sufficient tax equity financing available to meet the total demand in any year.

We are not able to insure against all potential risks and we may become subject to higher insurance premiums.

We are exposed to numerous risks inherent in the operation of solar energy projects, including equipment or system failure, manufacturing defects, natural disasters, terrorist attacks, sabotage, vandalism and environmental risks. The occurrence of any one of these events may result in substantial liability to us, including being named as a defendant in lawsuits asserting claims for environmental cleanup costs, personal injury, property damage, fines and penalties.

We currently maintain general liability insurance coverage for ourselves and our affiliates, which covers legal and contractual liabilities arising out of bodily injury, personal injury or property damage, including resulting loss of use, to third parties. We also maintain coverage for ourselves and our affiliates for physical damage to assets and resulting business interruption. However, such policies do not cover all potential losses and coverage is not always available in the insurance market on commercially reasonable terms. In addition, the insurance proceeds received for any loss of, or any damage to, any of our assets may be immediately claimed by lenders under our financing arrangements or otherwise may not be sufficient to restore the loss or damage without a negative impact on our results of operations and our ability to make cash distributions to our Class A shareholders. To the extent we experience covered losses under our insurance policies, the limit of our coverage for potential losses may be decreased. Furthermore, the losses that are insured through commercial insurance are subject to the credit risk of those insurance companies. While we believe our commercial insurance providers are currently creditworthy, we cannot assure you that such insurance companies will remain so in the future.

We may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. The insurance coverage we do obtain may contain large deductibles or fail to cover certain risks or all potential losses. In addition, our insurance policies are subject to annual review by our 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 we are not fully insured or we suffer losses due to one or more of our insurance carriers defaulting on their obligations or contesting their coverage obligations, it could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

 

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We do not own all of the land on which the projects in our Initial Portfolio are located and our 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 our rights.

We do not own all of the land on which the projects in our Initial Portfolio are located and they generally are, and our 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 easements, lease rights and rights of way of third parties that were created prior to our projects’ easements, leases and rights of way. As a result, some of our projects’ rights under such easements, leases or rights of way may be subject to the rights of these third parties. While we perform title searches, obtain title insurance, record our interests in the real property records of the projects’ localities and enter into non-disturbance agreements to protect ourselves against these risks, such measures may be inadequate to protect against all risk that our rights to use the land on which our projects are or will be located and our projects’ rights to such easements, leases and rights of way could be lost or curtailed. Any such loss or curtailment of our rights to use the land on which our projects are or will be located could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders. Please read “Business—Legal Proceedings.”

We may be subject to information technology system failures or network disruptions that could damage our business operations, financial conditions, or reputation.

We may be subject to information technology system failures and network disruptions. These may be caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, or similar events or disruptions. System redundancy may be ineffective or inadequate, and our disaster recovery planning may not be sufficient for all eventualities. System failures and disruptions could impede transactions processing and financial reporting.

Terrorist or similar attacks could impact our utility projects or surrounding areas and adversely affect our 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 our utility projects or the facilities of third parties on which our utility 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 our utility projects and the facilities of third parties on which our utility projects rely could severely disrupt business operations, result in loss of service to customers and significant expense to repair security breaches or system damage. Our Initial Portfolio, as well as projects we may acquire and the facilities of third parties on which our projects rely, may be targets of terrorist acts and affected by responses to terrorist acts, each of which could fully or partially disrupt our projects’ ability to produce, transmit, transport and distribute energy. 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 our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

 

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We are subject to risks associated with litigation or administrative proceedings that could materially impact our operations, including future proceedings related to projects we subsequently acquire.

We are subject to risks and costs, including potential negative publicity, associated with lawsuits or claims contesting the operation of our 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. Any such legal proceedings or disputes could materially delay our 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 our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders. Please read “Business—Legal Proceedings.”

Risks Related to Our Acquisition Strategy and Future Growth

We may not be successful in implementing our growth strategy of making accretive acquisitions of additional solar energy projects.

Our ability to expand our business operations and increase our quarterly cash distributions depends on pursuing opportunities to acquire contracted solar energy projects from our Sponsors and others consistent with our business strategy. Various factors, described in more detail in succeeding risk factors, could affect the availability, ability to acquire or performance of such solar energy projects we seek to acquire to grow our business, including the following factors, which are described in more detail in the additional risk factors below:

 

    our Sponsors’ failure to complete the development of the First Solar ROFO Projects and the SunPower ROFO Projects or our Sponsors’ or other third parties’ failure to develop other solar energy projects;

 

    our Sponsors’ decisions not to sell the ROFO Projects or other projects that they develop;

 

    our inability to consummate an acquisition of a ROFO Project or other a solar energy project due to an inability to agree on terms with our Sponsors or a third-party developer or our inability to arrange the required or desired financing for such acquisitions; or

 

    performance of the acquired assets at a level below expectations.

The occurrence of any of these events could substantially affect our ability to grow our business which would correspondingly have a material adverse effect on our ability to grow our cash distributions to our Class A shareholders.

Our Sponsors’ failure to complete the development of the First Solar ROFO Projects and the SunPower ROFO Projects or project developers’, including our Sponsors’, failure to develop other solar energy projects, including those opportunities that are part of our Sponsors’ development pipeline, could have a significant effect on our ability to grow.

Our Sponsors could decide not to develop or to discontinue development of the First Solar ROFO Projects and the SunPower ROFO Projects and project developers, including our Sponsors, could decide not to develop additional solar energy projects, including those opportunities included in our Sponsors’ development pipeline, for a variety of reasons, including, among other things, the following:

 

    issues with solar energy technology being unsuitable for widespread adoption at economically attractive rates of return;

 

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    demand for solar energy systems failing to develop sufficiently or taking longer than expected to develop;

 

    issues related to project siting, financing, construction, permitting, the environment, governmental approvals and the negotiation of project development agreements;

 

    a reduction in government incentives or adverse changes in policy and laws for the development or use of solar energy;

 

    a material drop in the price and availability of other energy sources;

 

    competition from other alternative energy technologies; and

 

    a material reduction in the retail or wholesale price of traditional utility generated electricity or electricity from other sources.

If the challenges of developing solar energy projects increase for project developers, including our Sponsors, our pool of available opportunities may be limited, which could have a material adverse effect on our ability to grow our business and make cash distributions to our Class A shareholders.

If solar energy technology is not suitable for widespread adoption at economically attractive rates of return, or if sufficient additional demand for solar energy systems does not develop or takes longer to develop than we anticipate, our ability to acquire accretive projects may decrease.

The solar energy market is at a relatively early stage of development, in comparison to fossil fuel-based electricity generation. If solar energy technology proves unsuitable for widespread adoption at economically attractive rates of return or if additional demand for solar energy systems fails to develop sufficiently or takes longer to develop than we anticipate, we may be unable to acquire additional accretive projects to grow our business. In addition, demand for solar energy systems in our targeted markets may develop to a lesser extent than we anticipate. Many factors may affect the viability of widespread adoption of solar energy technology and demand for solar energy systems, including the following:

 

    availability, substance and magnitude of support programs including government targets, subsidies, incentives, renewable portfolio standards and residential net ownership rules to accelerate the development of the solar energy industry;

 

    fluctuations in economic and market conditions that affect the price of, and demand for, conventional and non-solar renewable energy sources, such as increases or decreases in the price of natural gas, coal, oil and other fossil fuels and the cost-effectiveness of the electricity generated by solar energy systems compared to such sources and other non-solar renewable energy sources, such as wind;

 

    performance, reliability and availability of energy generated by solar energy systems compared to conventional and other non-solar renewable energy sources and products;

 

    competitiveness of other renewable energy generation technologies, such as hydroelectric, tidal, wind, geothermal, solar thermal, concentrated solar and biomass; and

 

    fluctuations in capital expenditures by end-users of solar energy systems which tend to decrease when the economy slows and when interest rates increase.

Solar energy failing to achieve or being significantly delayed in achieving widespread adoption could have a material adverse effect on our ability to grow our business and make cash distributions to our Class A shareholders.

 

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The development of utility-scale solar energy projects by our Sponsors and third parties face risks related to project siting, financing, construction, permitting, the environment, governmental approvals and the negotiation of project development agreements.

Utility-scale project development is a capital intensive business that relies heavily on the availability of debt and equity financing sources (including tax equity investments) to fund projected construction and other capital expenditures. As a result, in order to successfully develop a utility-scale solar energy project, development companies, including our Sponsors, often require 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 developer’s ability to obtain financing to complete the construction of a utility-scale solar energy project we may seek to acquire.

Utility-scale project development also requires the successful negotiation and execution of a variety of project contracts, including contracts related to offtake, transmission (in the case of utility-scale solar projects), siting and other arrangements with a variety of third parties. Failure to execute project contracts would limit the ability of a project developer to complete development of a project, which would limit the projects available to us to acquire.

Project developers, including our Sponsors, develop, construct, manage, own and operate utility-scale solar energy generation 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 and EPC providers must periodically apply for licenses and permits from various regulatory authorities and abide by their respective conditions and requirements. If project developers and EPC providers, including our Sponsors, 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 solar energy projects that may be available for us to acquire may be reduced or potential transaction opportunities may be delayed.

Our Residential Portfolio relies on net metering and related policies to offer competitive pricing to our customers in some of our key markets.

Forty-three states, Washington, D.C. and Puerto Rico have a regulatory policy known as net energy metering, or net metering. Each of the states where we currently serve customers has adopted a net metering policy. Net metering typically allows our customers who own grid-connected DG Solar assets to pay the utility only for electricity used net of electricity generated by their solar system. At the end of the billing period, the customer simply pays for the net energy used or receives a credit at the retail rate if more energy is produced than consumed. Utilities operating in states without a net metering policy may receive solar electricity that is exported to the grid when there is no simultaneous energy demand by the customer without providing retail compensation to the customer for this generation.

Our Residential Portfolio may be adversely impacted by the failure to expand existing limits on the amount of net metering in states that have implemented it, the failure to adopt a net metering policy where it currently is not in place, the imposition of new charges that only or disproportionately impact customers that utilize net metering, or reductions in the amount or value of credit that customers receive through net metering. Our Residential Portfolio may be adversely impacted by the unavailability of expedited or simplified interconnection for grid-tied solar energy systems or any limitation on the number of customer interconnections or amount of solar energy that utilities are required to allow in their service territory or some part of the grid. For example, utilities in some states have proposed imposing additional monthly charges on customers who interconnect solar energy systems installed on

 

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their homes. If such charges are imposed, the cost savings associated with switching to solar energy may be significantly reduced and our ability to expand our Residential Portfolio and compete with traditional utility providers could be impacted.

Limits on net metering, interconnection of solar energy systems and other operational policies in key markets could limit the number of solar energy systems installed in those markets. For example, California utilities limit net metering credit to 5% of the utilities’ aggregate customer peak demand. California has adopted legislation to establish a process and timeline for developing a new net metering program with no cap on participation. If the caps on net metering in California and other jurisdictions are reached or if the amount or value of credit that customers receive for net metering is significantly reduced, future customers will be unable to recognize the current cost savings associated with net metering. Net metering is used to establish competitive pricing for prospective customers and the absence of net metering for new customers would greatly limit demand for residential solar energy systems.

Government regulations providing incentives and subsidies for solar energy could change at any time and such changes may negatively impact our growth strategy.

Our strategy to grow our business through the acquisition of solar energy projects partly depends on current government policies that promote and support solar energy and enhance the economic viability of owning solar energy projects. Solar energy projects currently benefit from various U.S. federal, state and local governmental incentives, such as Investment Tax Credits, or ITCs, loan guarantees, Renewable Portfolio Standards, or RPS, the Modified Accelerated Cost-Recovery System, or MACRs, for depreciation and other incentives. These policies have had a significant impact on the development of solar energy and they could change at any time. These incentives make the development of solar energy projects more competitive by providing tax credits 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 solar energy projects to project developers, including our Sponsors, and the attractiveness of solar energy systems to utilities and DG Solar customers, which could reduce our acquisition opportunities. Such a loss or reduction could also reduce our willingness to pursue solar energy projects due to higher operating costs or lower revenues from offtake agreements.

The reduction or removal of these incentives may diminish the market for future solar energy offtake agreements and reduce the ability for solar developers to compete for future solar energy offtake agreements, which may reduce incentives for project developers, including our Sponsors, to develop such projects. The ITC is a U.S. federal incentive that provides an income tax credit to the owner of the project after the project commences commercial operations of up to 30% of eligible basis. A solar energy project must commence commercial operations on or before December 31, 2016, to qualify for the 30% ITC. A solar energy project that commences commercial operations after December 31, 2016, may qualify for an ITC equal to 10% of eligible basis. Under the Modified Accelerated Cost-Recovery System, owners of equipment used in a solar project generally claim all of their depreciation deductions with respect to such equipment over five years, even though the useful life of such equipment is generally greater than five years. To the extent that these policies are changed in a manner that reduces the incentives that benefit our projects, they could generate reduced revenues and reduced economic returns, experience increased financing costs and encounter difficulty obtaining financing.

Additionally, some U.S. 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 United States, 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. If, as a result of achieving these targets, these and other U.S. states

 

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do not increase their targets in the near future, demand for additional renewable energy could decrease. Any of the foregoing could have a material adverse effect on our ability to grow our business and make cash distributions to our Class A shareholders.

The seasonality of our operations may affect our liquidity.

The amount of electricity our solar energy systems produce is dependent in part on the amount of sunlight, or irradiation, where the assets are located. Because shorter daylight hours in winter months results in less irradiation, the generation of particular assets will vary depending on the season. We expect our Initial Portfolio’s power generation to be at its lowest during the winter season of each year. Similarly, we expect our first quarter revenue generation to be lower than other quarters.

We will need to maintain sufficient financial liquidity to absorb the impact of seasonal variations in energy production. We may need to reserve cash in other quarters or borrow under our revolving credit facility in order to pay distributions in quarters with shorter daylight hours.

A material drop in the price and or increase in the availability of other energy sources would harm our ability to acquire accretive utility projects.

A utility’s decision to buy renewable energy may be affected by the cost of other energy sources, 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 solar energy, becomes less cost-competitive due to reduced government targets and incentives that favor renewable energy, cheaper alternatives or otherwise, demand for solar energy and other forms of renewable energy could decrease. Slow growth or a long-term reduction in the energy demand could cause a reduction in the development of utility-scale projects.

The price of electricity from utilities could also decrease as a result of:

 

    the construction of additional electric transmission and distribution lines;

 

    a reduction in the price of natural gas as a result of new drilling techniques or a relaxation of associated regulatory standards;

 

    the energy conservation technologies and public initiatives to reduce electricity consumption; and

 

    development of new renewable energy technologies that provide less expensive energy.

Decreases in the prices of electricity from the utilities could affect our ability to acquire accretive assets, as our Sponsors and other renewable energy developers may not be able to compete with providers of other energy sources at such lower utility wholesale prices. Our inability to acquire accretive assets could have a material adverse effect on our ability to grow our business and make cash distributions to our Class A shareholders.

A material drop in the price of retail electricity from utilities would harm our ability to acquire accretive C&I and residential assets.

A reduction in utility electricity prices would make the purchase of solar energy systems or the purchase of energy under offtake agreements less economically attractive to residential and C&I customers. In addition, a shift in the timing of peak rates for utility-generated electricity to a time of day when solar energy generation is less efficient could make solar energy system offerings less competitive and reduce demand for such solar energy systems. If the price of energy available from utilities were to decrease due to any of these reasons, or others, we would be unable to acquire accretive DG Solar assets, which could have a material adverse effect on our ability to grow our business and make distributions to our Class A shareholders.

 

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The C&I market for energy is particularly sensitive to price changes. Typically, C&I customers pay less for energy from utilities than residential customers. Because the price we are able to charge C&I customers is only slightly lower than their current retail rate, any decline in the retail rate of energy for C&I entities could have a significant impact on the development of the C&I market due to the inability to attract additional C&I customers.

If the price of energy available from utilities were to decrease due to any of these reasons, or others, we would be unable to acquire accretive residential and C&I assets, which could have a material adverse effect on our ability to grow our business and make distributions to our Class A shareholders.

Our inability to acquire additional solar energy projects due to our Sponsors’ decision to keep projects that they develop, competing bids for a solar energy project, our inability to agree on terms with the developer of a solar energy project, including our Sponsors, or our inability to arrange the required or desired financing for such acquisitions could have a significant effect on our ability to grow.

Our acquisition strategy is based on our expectation of ongoing divestitures of solar energy projects by project developers, including our Sponsors. Though our ROFO Agreements provide us with a right of first offer for five years with respect to certain projects that our Sponsors are developing should they choose to sell such projects, there is no guarantee that the Sponsors will make available us any projects before our right of first offer expires or at all. Furthermore, even if we have the opportunity to make a first offer on projects that our Sponsors seek to sell or to acquire projects from a third party, we may choose not to pursue such opportunity, be unable to negotiate acceptable purchase contracts with them for such projects, be unable to obtain financing for these acquisitions on economically acceptable terms, be outbid by competitors including our Sponsors or be unable to obtain necessary governmental or third-party consent. Additionally, our Sponsors are under no obligation to accept any offer made by us with respect to such opportunities and upon a failure to agree to such offer are subject to few restrictions when selling to a third party. Furthermore, for a variety of reasons, we may decide not to exercise these rights when they become available, and our decision will not be subject to shareholder approval. As such, there is no guarantee that we will be able to make any such offer or consummate any acquisition of solar energy projects from our Sponsors.

Our ability to effectively consummate future acquisitions will also depend on our ability to arrange the required or desired financing for acquisitions.

We expect that OpCo will distribute a substantial amount of its available cash to its unitholders, including us, and will rely primarily upon its cash reserves (including the net proceeds that it will retain from this offering) and external financing sources, including borrowings under its revolving credit facility and the issuance of debt and equity securities, including by us, as well as tax equity financing to fund future acquisitions.

OpCo may not have sufficient availability under its credit facilities or have access to project-level financing on commercially reasonable terms when acquisition opportunities arise. Furthermore, our and its ability to access the capital markets may be limited by our and its financial condition at such time as well as the covenants in our debt agreements, general economic conditions and contingencies or other uncertainties that are beyond our control. An inability to obtain the required or desired financing could significantly limit our ability to consummate future acquisitions and effectuate our growth strategy. If financing is available, it may be available only on terms that could significantly increase our interest expense, impose additional or more restrictive covenants and reduce cash available for distribution.

 

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To the extent we are unable to finance growth with external sources of capital, the requirement in our OpCo’s limited liability company agreement to distribute all of its available cash and our current cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as businesses that reinvest all of their available cash to expand ongoing operations.

To the extent we issue additional shares, the payment of distributions on those additional shares may increase the risk that we will be unable to maintain or increase our cash distributions per share. There are no limitations in our partnership agreement on our ability to issue additional shares, including shares ranking senior to our Class A shares, and our shareholders (other than our Sponsors and their affiliates) will have no preemptive or other rights (solely as a result of their status as shareholders) to purchase any such additional shares. If we incur additional debt (under our revolving credit facility or otherwise) to finance our growth strategy, we will have increased interest expense, which in turn will reduce the available cash that we have to distribute to our Class A shareholders.

Even if we consummate acquisitions that we believe will be accretive to cash available for distribution per Class A share, those acquisitions may decrease the cash available for distribution per Class A share as a result of incorrect assumptions in our evaluation of such acquisitions, unforeseen consequences or other external events beyond our control.

The acquisition of existing solar energy projects involves the risk of overpaying for such projects (or not making acquisitions on an accretive basis) and failing to retain the customers of such projects. In addition, upon consummation of an acquisition, such acquisition will be subject to many of the risks set forth above in “—Risks Related to Our Business.” While we will perform due diligence on prospective acquisitions, we may not discover all potential risks, operational issues or other issues in such solar energy projects. In addition, in determining to acquire attractively priced operating solar energy systems, our general partner may be influenced by factors that could result in a misalignment or conflict of interest. Further, the integration and consolidation of acquisitions require substantial human, financial and other resources and, ultimately, our acquisitions may divert our management’s attention from our existing business concerns, disrupt our 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 we expect when we acquire solar energy projects could have a material adverse effect on our ability to grow our business and make cash distributions to our Class A shareholders. Any failure of our acquired solar energy projects to be accretive or difficulty in integrating such acquisition into our business could have a material adverse effect on our ability to grow our business and make cash distributions to our Class A shareholders.

If we choose to acquire solar energy projects before COD in the future, we will be subject to risks associated with the acquisition of solar energy projects that remain under construction, which could result in our inability to complete construction projects on time or at all, and make solar energy projects too expensive to complete or cause the return on an investment to be less than expected.

As part of our acquisition strategy or if we need to qualify for tax incentives, we may choose to acquire other solar energy 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 our 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;

 

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    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 our projects;

 

    supply interruptions;

 

    work stoppages;

 

    labor disputes;

 

    weather interferences;

 

    force majeure events;

 

    changes in laws;

 

    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, including the EPC provider.

In addition, where we have a relationship with a third party to complete construction of any construction project, we are subject to the viability and performance of the third party. Our 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 we could remain obligated under other agreements associated with the project, including offtake agreements, which may result in a default or termination of such offtake agreement.

Any of these risks could cause our 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 us, or could cause us to operate below expected capacity or availability levels, which could have a material adverse effect on our ability to grow our business and make cash distributions to our Class A shareholders.

While we currently own only solar energy projects, we may acquire other sources of clean energy and other assets. Any future acquisition of non-renewable energy projects may present unforeseen challenges and result in a competitive disadvantage relative to our more-established competitors.

While we currently only own solar assets and our current growth strategy is only focused on acquiring solar assets, we may in the future choose to acquire other sources of clean energy and other assets, including contracted wind and natural gas, and other types of projects, including land and transmission projects. We may be unable to identify attractive acquisition opportunities or acquire such projects at a price and on terms that are attractive. In addition, expanding beyond our current expertise may result in our Sponsors not having the level of experience, technical expertise, human resources management and other attributes necessary to operate such assets optimally, which could expose us 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 our management’s attention and resources, which could have an adverse impact on our business and place us at a competitive disadvantage relative to more established market

 

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participants. A failure to successfully integrate such acquisitions with our then-existing projects as a result of unforeseen operational difficulties or otherwise, could have a material adverse effect on our ability to grow our business and make cash distributions to our Class A shareholders.

Risks Related to Regulations

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

Certain of our Project Entities and offtake counterparties are subject to regulation by U.S. federal, state and local authorities. The wholesale sale of electric energy in the continental United States, other than certain areas in Texas, is subject to the jurisdiction of the U.S. Federal Energy Regulatory Commission, or FERC, and the ability of a Project Entity to charge the negotiated rates contained in its offtake agreement is subject to that project company’s maintenance of its general authorization from FERC to sell electricity at market-based rates or maintaining an exemption from such requirement. FERC may revoke a Project Entity’s market-based rate authorization if it determines that the 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 Project Entities’ offtake agreements could be changed by FERC if it determined such change is in the public interest. While this threshold public interest determination would require extraordinary circumstances under FERC precedent, if FERC decreases the prices paid to us for energy delivered under any of our offtake agreements, our revenues could be below our projections and our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders could be materially adversely affected.

Our Project Entities, with the exception of our DG Solar projects, are subject to the mandatory reliability standards of the North American Electric Reliability Corporation, or 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 and voltage standards, testing, documentation and outage management. If we fail to comply with these standards, we could be subject to sanctions, including substantial monetary penalties. Although our utility Project Entities are not subject to state utility rate regulation because they sell energy exclusively on a wholesale basis, we are subject to other state regulations that may affect our projects’ sale of energy and operations. Changes in state regulatory treatment are unpredictable and could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

With few material federal regulatory policies driving the growth of renewable energy, each U.S. state 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 an offtake agreement or other contract through often highly competitive auctions. A failure to anticipate accurately the future policy direction in a jurisdiction or to secure viable projects could have a material adverse effect on our ability to grow our business and make cash distributions to our Class A shareholders.

The structure of the industry and regulation in the United States 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. We expect the laws and regulation applicable to our 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 our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

 

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Our DG Solar business depends in part on the regulatory treatment of third-party owned solar energy systems.

Although we own the underlying solar energy systems of our DG Solar Projects, because we lease such systems to our residential DG Solar customers, their DG Solar offtake agreements are considered third-party ownership arrangements. Therefore, DG Solar customers are considered non-owner third parties. Sales of electricity by third parties face regulatory challenges in some U.S. states and jurisdictions. Other challenges pertain to whether third-party owned solar energy systems qualify for the same levels of rebates or other non-tax incentives available for customer-owned solar energy systems and whether third-party owned solar energy systems are eligible at all for these incentives. Reductions in, eliminations of, or rebates or incentives for these third-party ownership arrangements could reduce demand for our solar energy systems, adversely impact our access to capital and could cause us to increase the price we charge our customers for energy.

A failure to comply with laws and regulations relating to our interactions with current or prospective residential customers could result in negative publicity, claims, investigations, and litigation, and adversely affect our financial performance.

A segment of our business focuses on transactions with residential customers. We must comply with numerous federal, state and local laws and regulations that govern matters relating to our interactions with residential consumers, including those pertaining to privacy and data security, consumer financial and credit transactions, home improvement contracts, warranties and door-to-door solicitation. These laws and regulations are dynamic and subject to potentially differing interpretations, and various federal, state and local legislative and regulatory bodies may expand current laws or regulations, or enact new laws and regulations, regarding these matters. Changes in these laws or regulations or their interpretation could dramatically affect how we do business, acquire customers, and manage and use information we collect from and about current and prospective customers and the costs associated therewith. We strive to comply with all applicable laws and regulations relating to our interactions with residential customers. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Our non-compliance with any such law or regulations could also expose the company to claims, proceedings, litigation and investigations by private parties and regulatory authorities, as well as substantial fines and negative publicity, each of which may materially and adversely affect our business. We have incurred, and will continue to incur, significant expenses to comply with such laws and regulations, and increased regulation of matters relating to our interactions with residential consumers could require us to modify our operations and incur significant additional expenses, which could have an adverse effect on our business, financial condition and results of operations.

In addition, we are subject to federal, state and international laws relating to the collection, use, retention, security and transfer of personal information of our customers. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between one company and its subsidiaries, and among the subsidiaries and other parties with which we have commercial relations. Several jurisdictions have passed new laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing requirements may cause us to incur costs or require us to change our business practices. A failure by us, our suppliers or other parties with whom we do business to comply with a posted privacy policies or with other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others, which could have a detrimental effect on our business, results of operations and financial condition.

 

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We could be adversely affected by any violations of the U.S. Foreign Corrupt Practices Act and foreign anti-bribery laws.

The U.S. Foreign Corrupt Practices Act generally prohibits companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. We plan to implement policies mandating compliance with these anti-bribery laws. We currently only operate in the United States. However, we may acquire businesses outside of the United States and operate in parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. In addition, due to the level of regulation in our industry, our entry into new jurisdictions through internal growth or acquisitions requires substantial government contact where norms can differ from U.S. standards. While we will implement policies and procedures and conduct training designed to facilitate compliance with these anti-bribery laws, thereby mitigating the risk of violations of such laws, our employees, subcontractors and agents may take actions in violation of our policies and anti-bribery laws. Any such violation, even if prohibited by our policies, could subject us to criminal or civil penalties or other sanctions, which could have a material adverse effect on our business, financial condition, cash flows and reputation.

Risks Related to Our Project Agreements

We rely on a limited number of offtake counterparties and we are exposed to the risk that they are unwilling or unable to fulfill their contractual obligations to us or that they otherwise terminate their offtake agreements with us.

In most instances, we sell the energy generated by each of our utility and C&I scale projects to a single counterparty under a long-term offtake agreement. We expect that these offtake agreements will be the primary source of cash flows for these projects. Thus, the actions of even one offtake counterparty may cause material variability of our overall revenue, profitability and cash flows that are difficult to predict. Similarly, significant portions of our credit risk may be concentrated among a limited number of offtake counterparties and the failure of even one of these key offtake counterparties to pay its obligations to us could significantly impact our business and financial results. We expect our largest offtake counterparties, which are Southern California Edison and San Diego Gas & Electric, to account for an aggregate of between approximately   % and   % of the net generation of our Initial Portfolio and an aggregate of between approximately   % and   % of our EBITDA for the twelve-month period ending August 31, 2016, and an aggregate of between approximately   % and   % of the net generation of our Initial Portfolio and an aggregate of between approximately   % and   % of our EBITDA for the twelve-month period ending August 31, 2017. Our customers in our residential projects lease solar energy systems from us under long-term lease agreements. The lease terms are typically for 20 years, and require the customer to make monthly payments to us. Accordingly, we are subject to the credit risk of our customers. The average FICO score of our customers was approximately 765 at the time of initial contract. The risk of customer defaults may increase as we grow our portfolio of residential projects. Any or all of our offtake counterparties may fail to fulfill their obligations under their offtake agreements with us, whether as a result of the occurrence of any of the following factors or otherwise:

 

    specified events beyond our control or the control of an offtake counterparty may temporarily or permanently excuse the offtake counterparty from its obligation to accept and pay for delivery of energy generated by a utility project. These events could include a system emergency, transmission failure or curtailment, adverse weather conditions or labor disputes;

 

   

the ability of our offtake counterparties to fulfill their contractual obligations to us depends on their creditworthiness. We are exposed to the credit risk of our offtake counterparties over an extended period of time due to the long-term nature of our offtake agreements with them.

 

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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; and

 

    a default or failure by us to satisfy minimum energy delivery requirements or in mechanical availability levels under our offtake agreements could result in damage payments to the offtake counterparty or termination of the applicable offtake agreement.

If our offtake counterparties are unwilling or unable to fulfill their contractual obligations to us, or if they otherwise terminate such offtake agreements prior to their expiration, we may not be able to recover contractual payments and commitments due to us. Since the number of utility and C&I customers is limited, we may be unable to find a new energy purchaser on similar or favorable terms or at all. In some cases, there currently is no economical alternative counterparty to the original offtake counterparty. The loss of or a reduction in sales to any of our offtake counterparties could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

We may not be able to extend, renew or replace expiring or terminated offtake agreements at favorable rates or on a long-term basis.

As of December 31, 2014, the weighted average remaining life of offtake agreements across our Initial Portfolio was 21.3 years. Our ability to extend, renew or replace our existing offtake agreements depends on a number of factors beyond our control, including:

 

    whether the offtake 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 our delivery obligations under such offtake agreements;

 

    the regulatory environment applicable to our offtake 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 our offtake counterparties.

If we are not able to extend, renew or replace on acceptable terms existing utility offtake agreements before contract expiration, or if such agreements are otherwise terminated in accordance with their terms prior to their expiration, we may be forced to sell the energy on an uncontracted basis at prevailing market prices, which could be materially lower than we received under the offtake agreement. Alternatively, if there is no market for a project’s uncontracted energy or we lose access to the land on which a project sits, we may be required to decommission the project before the end of its useful life. Additionally, if we are not able to extend or renew our DG Solar offtake agreements before contract expiration, or if such agreements are otherwise terminated in accordance with their terms prior to expiration, we will lose all revenue with respect to such projects. Any failure to extend or replace a significant portion of our existing offtake agreements, or extending, renewing or replacing them at lower prices or with other unfavorable terms could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

 

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Certain of the offtake agreements in our Initial Portfolio and offtake agreements that we may enter into in the future contain or may contain provisions that allow the offtake counterparty to terminate the agreement or buyout all or a portion of the asset upon the occurrence of certain events. If these provisions are exercised and we are unable to enter into an offtake agreement on similar terms, in the case of a termination, or find suitable replacement assets to invest in, in the case of a buyout, our cash available for distribution could materially decline.

Certain of the offtake agreements in our Initial Portfolio and offtake agreements that we may enter into in the future allow or may allow the offtake counterparty to purchase all or a portion of the applicable asset from us. For example, pursuant to the offtake agreements for several of our solar assets, the offtake counterparty has the option to either (i) purchase the applicable solar energy system, typically              to              years after the completion of development under such offtake agreement, and for a purchase price equal to the greater of a value specified in the contact or the fair market value of the asset determined at the time of exercise of the purchase option or (ii) pay an early termination fee as specified in the contract, terminate the contact and require the project company owned by us to remove the applicable solar energy system from the site. If the offtake counterparty of the asset exercises its right to purchase the asset or terminate the offtake agreement, we would need to reinvest the proceeds from the sale or termination payment in one or more assets with similar economic attributes to maintain our cash available for distribution. If we were unable to locate and acquire suitable replacement assets in a timely manner, it could have a material adverse effect on our business, financial condition, results of operations and cash available for distribution to our Class A shareholders.

In addition, some of the offtake agreements in our Initial Portfolio and offtake agreements we may enter into in the future allow or may allow the offtake counterparty to terminate the offtake agreement in the event certain operating thresholds or performance measures are not achieved within specified time periods. In the event an offtake agreement for one or more of our assets is terminated under such provisions, it could materially and adversely affect our results of operations and cash available for distribution until we are able to replace the offtake agreement on similar terms. We cannot provide any assurance that offtake agreements containing such provisions will not be terminated or, in the event of termination, we will be able to enter into a replacement offtake agreement. Furthermore, any replacement offtake agreement may be on terms less favorable to us than the offtake agreement that was terminated.

Risks Related to Our Financial Activities

Our level of indebtedness or restrictions in the new credit facilities of OpCo could adversely affect our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

Upon the completion of this offering, OpCo will enter into a $         million revolving credit facility under which no amounts will be drawn at the closing of this offering and a $         million term loan. In the future, we may significantly increase our debt to fund our operations or future acquisitions. These new credit facilities and any future facilities will contain various covenants and restrictive provisions that will limit OpCo’s ability to, among other things:

 

    incur or guarantee additional debt;

 

    make distributions on or redeem or repurchase OpCo common units;

 

    make certain investments and acquisitions;

 

    incur certain liens or permit them to exist;

 

    enter into certain types of transactions with affiliates;

 

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    merge or consolidate with another company; and

 

    transfer, sell or otherwise dispose of projects.

In addition, OpCo’s debt could have important negative consequences on our financial conditions, including:

 

    restricting the ability of OpCo’s subsidiaries to make certain distributions to OpCo, OpCo’s ability to make certain distributions to us and our ability to make certain distributions with respect to our Class A shares in light of restricted payment and other financial covenants in OpCo’s credit facilities;

 

    increasing our vulnerability to general economic and industry conditions;

 

    requiring a substantial portion of OpCo’s cash flow from operations to be dedicated to the payment of principal and interest on its indebtedness, therefore reducing its ability to pay distributions to us and our ability to pay distributions to our Class A shareholders or to use OpCo’s cash flow to fund operations, capital expenditures and future business opportunities;

 

    limiting our ability to enter into long-term offtake agreements because such offtake agreements require credit support which may not be permitted under our financing arrangements;

 

    limiting our ability to enter into power interconnection agreements, which typically require credit support, which may not be permitted under our financing arrangements, for the construction of interconnection facilities and network upgrades to the transmission grid;

 

    limiting our ability to fund operations or future acquisitions;

 

    exposing us to the risk of increased interest rates because certain of OpCo’s borrowings are at variable rates of interest;

 

    limiting our ability to obtain additional financing for working capital, including collateral postings, capital expenditures, debt service requirements, acquisitions and general or other purposes; and

 

    limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who have less debt.

The new credit facilities also will contain covenants requiring OpCo to maintain certain financial ratios, including as a condition to making cash distributions to us and its other unitholders. OpCo’s ability to meet those financial ratios and tests can be affected by events beyond our 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 us. As a result, we may be unable to make distributions to our Class A shareholders. In addition, the new credit facilities will contain events of default customary for transactions of this nature, including the occurrence of a change of control.

The provisions of the new credit facilities may affect our ability to pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. A failure to comply with the provisions of the new credit facilities could result in an event of default, which could enable the lenders to declare, subject to the terms and conditions of the applicable credit facilities, 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 our Class A shareholders could experience a partial or total loss of their investment.

In addition, a high level of indebtedness increases the risk that we may default on our debt obligations. Our ability to meet our debt obligations and to reduce our level of indebtedness depends

 

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on our future performance. General economic conditions, commodity prices and financial, business and other factors affect our operations and our future performance. Many of these factors are beyond our control. We may not be able to generate sufficient cash flows to pay the interest on our debt and future working capital, borrowings or equity financing may not be available to pay or refinance such debt. Factors that will affect our ability to raise cash through an offering of our Class A shares or a refinancing of our debt include financial market conditions, the value of our assets and our performance at the time we need capital. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Factors and Trends Affecting Our Business—Liquidity and Capital Resources.”

Risks Related to Our Relationship with Our Sponsors

Since the economic and management rights of First Solar and SunPower are impacted by the performance of our business in different ways, First Solar and SunPower may fail to agree on our management, which could adversely affect our ability to execute our business plan.

From the closing of this offering until November 30, 2019, our Sponsors will each own (i) 50% of the economic interests of Holdings, which represent the incentive distribution rights, and (ii) 50% of the management interests of Holdings, which represent the right to govern Holdings and our general partner. In addition, each of our Sponsors has certain rights to appoint the directors of our general partner and to nominate the officers of our general partner for approval by the board of our general partner. Beginning after November 30, 2019, the economic interests of our Sponsors are subject to adjustment annually based on the relative performance of each Sponsor’s Project Entities and any additional assets contributed to OpCo by such Sponsor against the performance of all Project Entities held by OpCo. If, after the adjustment to a Sponsor’s economic interests, such Sponsor has held at least     % of the economic interests for at least two consecutive fiscal years, then such Sponsor shall have the option to require the other Sponsor to transfer part of its management interest to such Sponsor; thereby effectively giving such Sponsor management control. In addition, after November 30, 2019, payments on the economic interests of Holdings to our Sponsors are subject to an annual reallocation among the Sponsors based on the relative performance of the assets contributed by each Sponsor compared to the projected performance of such assets at the time of contribution. Each Sponsor can also lose its right to appoint directors and officers of our general partner in the event such Sponsor (i) holds less than     % of the economic interests for the three previous fiscal years or (ii) if, in each of such three fiscal years, the cash generated and distributed, subject to certain exclusions, by one Sponsor’s Project Entities and any additional assets contributed by such Sponsor to OpCo prior to the end of the most recent fiscal year is less than     % of the cash generated and distributed, subject to certain exclusions, by both Sponsors’ Project Entities and any additional assets contributed by both Sponsors to OpCo prior to the end of the most recent fiscal year. In addition, in the event our Sponsors cannot agree on a management decision after a required negotiation period, either Sponsor can initiate a process that will result in the purchase by one Sponsor of the other Sponsor’s interests in Holdings or a sale to a third party. A shift in control to one of our Sponsors could result in significant changes to our business plan, results of operations, financial condition and growth prospects.

While these provisions are intended to incentivize our Sponsors to contribute high-performing assets to us, they also cause our Sponsors to have differently aligned interests in us, which could cause them to disagree on certain management decisions, including the timing, selection, cost and financing of acquisitions. While our Sponsors are under no obligation to provide us additional acquisition opportunities, we expect our Sponsors will be our primary source for the acquisition of additional solar energy projects in the future. If our Sponsors do not agree on their management of us, one or both of them may choose not to offer us additional future solar energy projects which could have a material adverse effect on our ability to grow our business and make distributions to our Class A shareholders.

 

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Our general partner and its affiliates, including our Sponsors, have conflicts of interest with us and limited duties to us and our Class A shareholders, and they may favor their own interests to the detriment of us and our Class A shareholders.

Following this offering, our Sponsors will indirectly own and control our general partner and will appoint all of our general partner’s officers and directors. All of our general partner’s executive officers and a majority of our general partner’s initial directors also will be officers of our Sponsors. Conflicts of interest exist and may arise as a result of the relationships between our general partner and its affiliates, including our Sponsors, on the one hand, and us and our shareholders, on the other hand. Although our general partner has a duty to manage us in a manner beneficial to us and our shareholders, our general partner’s directors and officers have fiduciary duties to manage our general partner in a manner beneficial to its owner, Holdings, which is owned by our Sponsors. In addition, under the Management Services Agreements, First Solar and SunPower will each provide certain services or arrange for certain services to be provided to us, including with respect to carrying out our day-to-day management and providing individuals to act as our general partner’s executive officers. These same executive officers may help our general partner’s board of directors evaluate potential acquisition opportunities presented by First Solar under the First Solar ROFO Agreement and SunPower under the SunPower ROFO Agreement.

In resolving such conflicts of interest, our general partner may favor its own interests and the interests of its affiliates, including our Sponsors, over the interests of our shareholders. These conflicts include the following situations, among others:

 

    none of our partnership agreement, the Management Services Agreements or any other agreement requires First Solar, SunPower or their affiliates to pursue a business strategy that favors us or uses our projects or dictates what markets to pursue or grow. First Solar’s and SunPower’s directors and officers have a fiduciary duty to make these decisions in the best interests of First Solar and SunPower, respectively, which may be contrary to our interests;

 

    contracts between us, on the one hand, and our general partner and its affiliates, on the other, are not and may not be the result of arm’s-length negotiations;

 

    our general partner’s affiliates are not limited in their ability to compete with us and neither our general partner nor its affiliates have any obligation to present business opportunities to us except for the First Solar ROFO Projects and the SunPower ROFO Projects if they decide to sell the projects under the related ROFO Agreements during the term of such agreements;

 

    our general partner is allowed to take into account the interests of parties other than us, such as First Solar and SunPower, in resolving conflicts of interest;

 

    we do not have any officers or employees and rely solely on officers and employees of our general partner and its affiliates, including First Solar and SunPower. The officers of our general partner will also devote significant time to the business of First Solar and SunPower and will be compensated by First Solar and SunPower accordingly, as applicable;

 

    our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties and limits our general partner’s liabilities and the remedies available to our shareholders for actions that, without these limitations, might constitute breaches of fiduciary duty under applicable Delaware law;

 

    except in limited circumstances, our general partner has the power and authority to conduct our business without shareholder approval;

 

    actions taken by our general partner may affect the amount of cash available to pay distributions to our Class A shareholders;

 

    our general partner determines which costs incurred by it are reimbursable by us;

 

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    we reimburse our general partner and its affiliates for expenses;

 

    our general partner intends to limit its liability regarding our contractual and other obligations;

 

    our Class A shares are subject to our general partner’s limited call right;

 

    our general partner controls the enforcement of the obligations that it and its affiliates owe to us, including First Solar’s obligations under the First Solar ROFO Agreement and SunPower’s obligations under the SunPower ROFO Agreement and our Sponsors’ other commercial agreements with us; and

 

    we may choose not to retain counsel, independent accountants or other advisors separate from those retained by our general partner to perform services for us or for the holders of our Class A shares.

Please read “Conflicts of Interests and Duties.”

A decision by our general partner to favor its own interests and the interests of our Sponsors over our interests and the interests of our shareholders could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

Our Sponsors and other affiliates of our general partner are not restricted in their ability to compete with us.

Our partnership agreement provides that our general partner will be restricted from engaging in any business activities other than acting as our general partner and those activities incidental to its ownership of interests in us. Affiliates of our general partner, including our Sponsors, and their subsidiaries, are not prohibited, including under the Management Services Agreements, from owning solar energy projects or engaging in businesses that compete directly or indirectly with us. Our Sponsors currently hold interests in, and may make investments in and purchases of, entities that acquire, own and operate other power generators. Our Sponsors will be under no obligation to make any acquisition opportunities available to OpCo, other than under the First Solar ROFO Agreement and the SunPower ROFO Agreement.

Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers and directors and our Sponsors. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and holders of our Class A shares.

If our Sponsors terminate their respective services agreements with us or either of them defaults in the performance of its obligations thereunder, we may be unable to contract with a substitute service provider on similar terms, or at all.

We will rely on our Sponsors to provide us with administrative and management services under the Management Services Agreements and will not have independent executive or senior management personnel. Under these agreements, certain of our Sponsors’ employees will provide services to us. These services will not be the primary responsibility of these employees, nor will these employees be

 

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required to act for us alone. The Management Services Agreements will not require our Sponsors to engage any specific individuals for purposes of providing services to us and our Sponsors will have the discretion to determine which of their respective employees will perform the services required to be provided to us. Each of the Management Services Agreements will provide that First Solar and SunPower, respectively, may terminate the applicable agreement upon 30 days prior written notice of termination to us if we default in the performance or observance of any material term, condition or covenant contained in the agreement in a manner that results in material harm to First Solar, SunPower or any of their respective affiliates other than our subsidiaries and us, and the default continues unremedied for a period of 60 days after written notice of the breach is given to us upon the happening of certain events relating to the bankruptcy or insolvency of OpCo, us or certain OpCo’s subsidiaries, or if First Solar and SunPower cease to control us. If either First Solar or SunPower terminates its Management Services Agreement or if either of them defaults in the performance of its obligations thereunder, we may be unable to contract with a substitute service provider on similar terms or at all, and the costs of substituting service providers may be substantial. In addition, our Sponsors are familiar with our projects and, as a result, our Sponsors have certain synergies with us. Substitute service providers would lack such synergies and may not be able to provide the same level of service to us. If we cannot locate a service provider that is able to provide us with substantially similar services as our Sponsors provide under the Management Services Agreements on similar terms, it would likely have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

In addition, we will depend on our Sponsors to provide a substantial portion of the services required for the operation and maintenance and the administration and management of our projects. Our Sponsors may not perform their services as, when and where required. Additionally, in the event that our Sponsors have a dispute, they have agreed to a resolution provision that could ultimately eliminate the ownership of one or both of our Sponsors, allowing such Sponsor(s) to terminate any agreements under which they provide operation and maintenance or administration and management services to us. To the extent that First Solar or SunPower do not fulfill their obligations to manage operations of our projects, are not effective in doing so or terminate the agreements governing such services, we may not be able to enter into replacement agreements on favorable terms, or at all. If we are unable to enter into long-term replacement agreements to provide for operation and maintenance and the administration and management of our projects and other required services, we would seek to purchase the related services under short-term agreements, exposing us to market price volatility. The failure of First Solar or SunPower to fulfill its contractual obligations to us could have a material adverse effect on our business, financial condition, results of operations and cash available for distribution to our Class A shareholders.

Our arrangements with our Sponsors limit their liability, and we have agreed to indemnify our Sponsors against claims that they may face in connection with such arrangements, which may lead our Sponsors to assume greater risks when making decisions relating to us than they otherwise would if acting solely for their own account.

Under the Management Services Agreements, our Sponsors and their affiliates will not assume any responsibility other than to provide or arrange for the provision of the services described in the applicable Management Services Agreement in good faith. Additionally, under the Management Services Agreements, the liability of our Sponsors and their affiliates will be limited to the fullest extent permitted by law to conduct involving bad faith, fraud, willful misconduct or recklessness or, in the case of a criminal matter, to action that was known to have been unlawful. We will agree to indemnify our Sponsors and their affiliates to the fullest extent permitted by law from and against any claims, liabilities, losses, damages, costs or expenses incurred by an indemnified person or threatened in connection with our operations, investments and activities or in respect of or arising from the Management Services Agreements or the services provided by our Sponsors and their affiliates, except to the extent that the claims, liabilities, losses, damages, costs or expenses are determined to

 

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have resulted from the conduct in respect of which such persons have liability as described above. Additionally, the maximum amount of the aggregate liability of our Sponsors or any of their affiliates in providing services under the Management Services Agreements or of any director, officer, employee, agent or other representative of our Sponsors or any of their affiliates, will be equal to the aggregate amount of the management fee received by the applicable Sponsor in the most recent calendar year. These protections may result in our Sponsors and their affiliates tolerating greater risks when making decisions than otherwise would be the case, including when determining whether to use leverage in connection with acquisitions. The indemnification arrangements to which our Sponsors and their affiliates are a party may also give rise to legal claims for indemnification, which could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

The credit and risk profile of our general partner and its owners, our Sponsors, could adversely affect our credit ratings and risk profile, which could increase our borrowing costs or hinder our ability to raise capital.

The credit and business risk profiles of our general partner and our Sponsors may be considered in credit evaluations of us because our general partner, which is owned by our Sponsors, controls our business activities, including our and OpCo’s cash distribution policy and growth strategy. Any adverse change in the financial condition of First Solar or SunPower, including the degree of its financial leverage and its dependence on cash flows from us to service its indebtedness, may adversely affect our credit ratings and risk profile.

If we were to seek a credit rating, our credit rating may be adversely affected by the leverage of our general partner, First Solar or SunPower, as credit rating agencies such as Standard & Poor’s Ratings Services, Moody’s Investors Service and Fitch Ratings, Inc. may consider the leverage and credit profile of First Solar or SunPower because of their ownership interests in and control of us. Any adverse effect on our credit rating would increase our cost of borrowing or hinder our ability to raise financing in the capital markets, which could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our Class A shareholders.

Risks Related to this Offering and Ownership of Our Class A Shares

Holders of our Class A shares have limited voting rights and are not entitled to elect our general partner or its directors.

Unlike the holders of common stock in a corporation, our shareholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Our shareholders will have no right on an annual or ongoing basis to elect our general partner or its board of directors. Rather, the board of directors of our general partner will be appointed by our Sponsors, indirectly through their ownership of Holdings. Furthermore, if our shareholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which the Class A shares will trade could be diminished because of the absence or reduction of a takeover premium in the trading price. Our partnership agreement also contains provisions limiting the ability of shareholders to call meetings or to acquire information about our operations, as well as other provisions limiting the shareholders’ ability to influence the manner or direction of management.

 

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Our partnership agreement restricts the remedies available to holders of our Class A shares for actions taken by our general partner that might otherwise constitute breaches of fiduciary duties.

Our partnership agreement contains provisions that restrict the remedies available to shareholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duties under state fiduciary duty law. For example, our partnership agreement provides that:

 

    whenever our general partner, the board of directors of our general partner or any committee thereof (including the conflicts committee) makes a determination or takes, or declines to take, any other action in their respective capacities, our general partner, the board of directors of our general partner and any committee thereof (including the conflicts committee), as applicable, is required to make such determination, or take or decline to take such other action, in good faith, meaning that it subjectively believed that the decision was in the best interests of, or not adverse to, our partnership, and, except as specifically provided by our partnership agreement, will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;

 

    our general partner will not have any liability to us or our shareholders for decisions made in its capacity as a general partner so long as such decisions are made in good faith;

 

    our general partner and its officers and directors will not be liable for monetary damages to us or our shareholders resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and

 

    our general partner will not be in breach of its obligations under the partnership agreement (including any duties to us or our shareholders) if a transaction with an affiliate or the resolution of a conflict of interest is:

 

    approved by the conflicts committee of our general partner’s board of directors, although our general partner is not obligated to seek such approval;

 

    approved by the vote of a majority of the outstanding shares, excluding any shares owned by our general partner and its affiliates;

 

    determined by the board of directors of our general partner to be on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or

 

    determined by the board of directors of our general partner to be fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.

In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner or the conflicts committee must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our shareholders or the conflicts committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the affiliate transaction or conflict of interest satisfies either of the standards set forth in the third and fourth subbullets above, then it will be presumed that, in making its decision, the board of directors of our general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership challenging such determination, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Duties.”

 

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Our partnership agreement restricts the voting rights of shareholders owning 20% or more of any class of shares then outstanding.

Shareholders’ voting rights are further restricted by a provision of our partnership agreement providing that any shares held by a person that owns 20% or more of any class of shares then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such shares with the prior approval of the board of directors of our general partner, cannot vote on any matter.

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our Class A shares with contractual standards governing its duties.

Our partnership agreement contains provisions that eliminate the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law and replace those standards with several different contractual standards. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, free of any duties to us and our shareholders. This provision entitles our general partner and its affiliates to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our shareholders. Examples of decisions that our general partner and its affiliates may make in their individual capacities include:

 

    how to allocate corporate opportunities among us and its affiliates;

 

    whether to exercise its limited call right, preemptive rights or registration rights;

 

    whether to seek approval of the resolution of a conflict of interest by the conflicts committee of the board of directors of our general partner;

 

    how to exercise its voting rights with respect to the units it or its affiliates own in OpCo and us;

 

    whether to exchange its OpCo common units for our Class A shares; and

 

    whether to consent to any merger, consolidation or conversion of us or OpCo or to an amendment to our partnership agreement or the OpCo limited liability company agreement.

These decisions may be made by the owner of our general partner. At the time of this offering, Holdings, which is owned by our Sponsors, is the owner of our general partner.

By purchasing a Class A share, a Class A shareholder becomes bound by the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Duties—Duties of Our General Partner.”

Our general partner interest or the control of our general partner may be transferred to a third party without shareholder consent.

Our partnership agreement does not restrict the ability of Holdings to transfer all or a portion of its ownership interest in our general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own designees and thereby exert significant control over the decisions made by the board of directors and officers.

 

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The incentive distribution rights of our Sponsors, through Holdings, may be transferred to a third party without shareholder consent.

Our Sponsors may cause Holdings to transfer its incentive distribution rights to a third party at any time without the consent of our shareholders. If our Sponsors transfers their incentive distribution rights to a third party, they will have less incentive to support the growth of our partnership and an increase in our distributions. A transfer of incentive distribution rights by our Sponsors could reduce the likelihood of First Solar or SunPower selling or contributing additional solar energy projects to us, which in turn would impact our ability to grow our portfolio.

Our Sponsors, through Holdings, or any transferee holding a majority of the incentive distribution rights, may elect to cause OpCo to issue common units to Holdings in connection with a resetting of the target distribution levels related to the incentive distribution rights, without the approval of the conflicts committee of our general partner or our shareholders. This election may result in lower distributions to our Class A shareholders in certain situations.

The holder or holders of a majority of the incentive distribution rights, which is initially our Sponsors through Holdings, have the right, at any time when there are no OpCo subordinated units outstanding and the holders have received incentive distributions at the highest level to which they are entitled (200%) for each of the prior four consecutive fiscal quarters (and the aggregate amounts distributed in respect of such four-quarter period did not exceed adjusted operating surplus for such four-quarter period), to reset the minimum quarterly distribution and the initial target distribution levels at higher levels based on our cash distribution at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be reset to an amount equal to the average cash distribution per unit for the two fiscal quarters immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”), and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution. Our Sponsors have the right to transfer the incentive distribution rights at any time, in whole or in part, and any transferee holding a majority of the incentive distribution rights shall have the same rights as our Sponsors with respect to resetting target distributions.

In the event of a reset of the minimum quarterly distribution and the target distribution levels, the holders of the incentive distribution rights will be entitled to receive, in the aggregate, the number of OpCo’s common units equal to that number of OpCo common units which would have entitled the holders to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions on the incentive distribution rights in the prior two quarters. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal expansion projects that would not otherwise be sufficiently accretive to cash distributions per OpCo common unit. It is possible, however, that our Sponsors or a transferee could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may therefore desire to be issued OpCo common units rather than retain the right to receive incentive distribution payments based on target distribution levels that are less certain to be achieved in the then-current business environment. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our Class A shareholders to experience reduction in the amount of cash distributions that they would have otherwise received had we not issued Class A shares to our general partner in connection with resetting the target distribution levels. Please read “Provisions of Our Partnership Agreement and the OpCo Limited Liability Company Agreement Relating to Cash Distributions—Holdings’ Right to Reset Incentive Distribution Levels.”

 

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Even if holders of our Class A shares are dissatisfied, they cannot initially remove our general partner without its consent.

Shareholders will be unable initially to remove our general partner or OpCo’s managing member without its consent because our general partner and its affiliates will own sufficient shares upon completion of the offering to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding shares (including shares owned by our general partner and its affiliates, including our Sponsors) is required to remove our general partner. Upon completion of this offering, our general partner and its affiliates, including our Sponsors, will own     % of our Class B shares (or     % of our Class B shares, if the underwriters exercise their option to purchase additional Class A shares). In addition, any vote to remove our general partner during the subordination period must provide for the election of a successor general partner by the holders of a majority of the Class A shares and a majority of the Class B shares, voting as separate classes. This will provide Holdings the ability to prevent the removal of our general partner.

Furthermore, shareholders’ voting rights are further restricted by the partnership agreement provision providing that any shares held by a person that owns 20% or more of any class of shares then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such shares with the prior approval of the board of directors of our general partner, cannot vote on any matter.

Our partnership agreement also contains provisions limiting the ability of shareholders to call meetings or to acquire information about our operations, as well as other provisions limiting the shareholders’ ability to influence the manner or direction of management.

Class A shareholders will experience immediate and substantial dilution in as adjusted net tangible book value of $         per Class A share.

The assumed initial public offering price of $         per Class A share (the midpoint of the price range set forth on the cover page of this prospectus) exceeds as adjusted net tangible book value of $         per Class A share. Based on the assumed initial public offering price of $         per Class A share, shareholders will incur immediate and substantial dilution of $         per Class A share. This dilution results primarily because some of the assets contributed to us by affiliates of SunPower are recorded at their historical cost in accordance with U.S. GAAP, and not their fair value. Please read “Dilution.”

We may issue additional Class A shares or other partnership interests without shareholder approval, which would dilute shareholder interests.

At any time, we may issue an unlimited number of limited partner interests of any type without the approval of our shareholders, and our shareholders will have no preemptive or other rights (solely as a result of their status as shareholders) to purchase any such limited partner interests. Further, there are no limitations in our partnership agreement on our ability to issue equity securities that rank equal or senior to our Class A shares as to distributions or in liquidation or that have special voting rights and other rights. The issuance by us of additional Class A shares or other equity securities of equal or senior rank will have the following effects:

 

    our existing shareholders’ proportionate ownership interest in us will decrease;

 

    the amount of cash we have available to distribute on each Class A share may decrease;

 

    because a lower percentage of total outstanding OpCo units will be OpCo subordinated units, the risk that a shortfall in payment of the minimum quarterly distribution will be borne by OpCo’s common unitholders, including 8point3 Partners, will increase;

 

    the ratio of taxable income to distributions may increase;

 

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    the relative voting strength of each previously outstanding share may be diminished; and

 

    the market price of our Class A shares may decline.

Our general partner has a limited call right that may require you to sell your Class A shares at an undesirable time or price.

If at any time our general partner and its affiliates, including our Sponsors, own more than     % of our then-outstanding Class A shares on a fully-diluted basis (or OpCo common units convertible into such ownership percentage), our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the Class A shares held by unaffiliated persons at a price not less than their then-current market price, as calculated pursuant to the terms of our partnership agreement. As a result, you may be required to sell your Class A shares at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your shares. At the completion of this offering, our general partner and its affiliates will own approximately     % of our Class A shares. At the end of the subordination period (which could occur as early as                     , 2016), assuming no additional issuances of Class A shares by us, our general partner and its affiliates will own OpCo common units convertible into approximately     % of our outstanding Class A shares and therefore would not be able to exercise the call right at that time. For additional information about our general partner’s call right, please read “Material Provisions of the 8point3 Partners Partnership Agreement—Limited Call Right.”

Reimbursements and fees owed to our general partner and its affiliates for services provided to us or on our behalf will reduce cash available for distribution. The amount and timing of such reimbursements and fees will be determined by our general partner and there are no limits on the amount that OpCo may be required to pay.

Under the OpCo limited liability company agreement, prior to making any distributions on OpCo’s common units, OpCo will reimburse our general partner and its affiliates, including 8point3 Partners, for out-of-pocket expenses they incur and payments they make on our behalf. OpCo will also pay certain fees and reimbursements under the Management Services Agreements prior to making any distributions on OpCo’s common units. The reimbursement of expenses and certain payments made under credit support arrangements and payment of fees, if any, to our general partner and its affiliates will reduce the amount of available cash OpCo has to pay cash distributions to us and the amount that we have available to pay distributions to our Class A shareholders. Under the OpCo limited liability company agreement, there is no limit on the fees and expense reimbursements OpCo may be required to pay. Please read “Our Cash Distribution Policy and Restrictions on Distributions.”

Our general partner’s discretion in establishing cash reserves may reduce the amount of available cash.

Our partnership agreement and the OpCo limited liability company agreement require OpCo’s managing member to deduct from operating surplus cash reserves that it determines are necessary to fund future operating expenditures. In addition, our partnership agreement and the OpCo limited liability company agreement permits our general partner to reduce available cash by establishing cash reserves for the proper conduct of business, to comply with applicable law or agreements to which we or our subsidiaries are a party or to provide funds for future distributions to OpCo’s members and our partners. These cash reserves will affect the amount of cash distributed by OpCo and the amount of cash available for distribution to our Class A shareholders.

 

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We and OpCo can borrow money to pay distributions, which would reduce the amount of credit available to operate our business.

Our partnership agreement and the OpCo limited liability company agreement allow us to make working capital borrowings to pay distributions to our Class A shareholders or OpCo’s unitholders. Accordingly, if we or OpCo have available borrowing capacity, we or OpCo can make distributions on our Class A shares or OpCo’s common and subordinated units, as applicable, even though cash generated by our operations may not be sufficient to pay such distributions. Any working capital borrowings by us or OpCo to make distributions will reduce the amount of working capital borrowings we or OpCo can make for operations. For more information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Factors and Trends Affecting Our Business—Liquidity and Capital Resources.”

Increases in interest rates could adversely impact the price of our Class A shares, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.

Interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our share price is impacted by our level of our cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our shares, and a rising interest rate environment could have an adverse impact on the price of our Class A shares, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.

There is no existing market for our Class A shares and a trading market that will provide shareholders with adequate liquidity may not develop. The price of our Class A shares may fluctuate significantly and shareholders could lose all or part of their investment.

Prior to this offering, there has been no public market for the Class A shares. After this offering, there will be              publicly traded Class A shares, assuming no exercise of the underwriters’ option to purchase additional Class A shares. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. Shareholders may not be able to resell their Class A shares at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the Class A shares and limit the number of investors who are able to buy the Class A shares.

The initial public offering price for our Class A shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the Class A shares that will prevail in the trading market. The market price of our Class A shares may decline below the initial public offering price. The market price of our Class A shares may also be influenced by many factors, some of which are beyond our control, including:

 

    our quarterly distributions;

 

    our quarterly or annual earnings or those of other companies in our industry;

 

    announcements by us or our competitors of significant contracts or acquisitions;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    general economic conditions;

 

    the failure of securities analysts to cover our Class A shares after this offering or changes in financial estimates by analysts;

 

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    future sales of our Class A shares; and

 

    the other factors described in these “Risk Factors.”

Except in limited circumstances, our general partner has the power and authority to conduct our business without shareholder approval.

Under our partnership agreement, our general partner has full power and authority to do all things, other than those items that require shareholder approval or with respect to which our general partner has sought conflicts committee approval, on such terms as it determines to be necessary or appropriate to conduct our business. In addition, since we are the managing member of OpCo, determinations made by us under the OpCo limited liability company agreement will be made at the direction of our general partner. Decisions that may be made by our general partner in accordance with our partnership agreement or the OpCo limited liability company agreement include:

 

    making any expenditures, lending or borrowing money, assuming, guaranteeing or contracting for indebtedness and other liabilities, issuing evidences of indebtedness, including indebtedness that is convertible into our securities, and incurring any other obligations;

 

    purchasing, selling, acquiring or disposing of our securities, or issuing additional options, rights, warrants and appreciation rights relating to our securities;

 

    acquiring, disposing, mortgaging, pledging, encumbering, hypothecating or exchanging any or all of our assets;

 

    negotiating, executing and performing any contracts, conveyances or other instruments;

 

    making cash distributions;

 

    selecting and dismissing employees and agents, outside attorneys, accountants, consultants and contractors and determining their compensation and other terms of employment or hiring;

 

    maintaining insurance for our or OpCo’s benefit and the benefit of our respective partners;

 

    forming, acquiring an interest in, contributing property to and making loans to any limited or general partnership, joint venture, corporation, limited liability company or other entity;

 

    controlling any matters affecting our rights and obligations, including bringing and defending of actions at law or in equity, otherwise engaging in the conduct of litigation, arbitration or mediation, incurring legal expenses and settling claims and litigation;

 

    indemnifying any person against liabilities and contingencies to the extent permitted by law;

 

    making tax, regulatory and other filings or rendering periodic or other reports to governmental or other agencies having jurisdiction over our business or assets; and

 

    entering into and terminating agreements with any of its affiliates to render services to us or to itself in the discharge of its duties as our general partner.

Our partnership agreement provides that our general partner must act in good faith when making decisions on our behalf, and our partnership agreement further provides that in order for a determination to be made in good faith, our general partner must subjectively believe that the determination is in the best interests of our partnership. Please read “Material Provisions of the 8point3 Partners Partnership Agreement—Meetings; Voting Rights” for information regarding matters that require shareholder approval.

 

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Contracts between us, on the one hand, and our general partner and its affiliates, on the other hand, will not be the result of arm’s-length negotiations.

Our partnership agreement allows our general partner to determine, in good faith, any amounts to pay itself or its affiliates for any services rendered to us. Our general partner may also enter into additional contractual arrangements with any of its affiliates on our behalf. Our general partner will determine in good faith the terms of any arrangement or transaction entered into after the completion of this offering. Similarly, agreements, contracts or arrangements between us and our general partner and its affiliates that are entered into following the completion of this offering will not be required to be negotiated on an arm’s-length basis, although, in some circumstances, our general partner may determine that the conflicts committee may make a determination on our behalf with respect to such arrangements.

Our general partner and its affiliates will have no obligation to permit us to use any assets or services of our general partner and its affiliates, except as may be provided in contracts entered into specifically for such use. There is no obligation of our general partner and its affiliates to enter into any contracts of this kind.

Class A shareholders will have no right to enforce the obligations of our general partner and its affiliates under agreements with us.

Any agreements between us, on the one hand, and our general partner and its affiliates, on the other hand, will not grant to the shareholders, separate and apart from us, the right to enforce the obligations of our general partner and its affiliates in our favor.

Our general partner decides whether to retain separate counsel, accountants or others to perform services for us.

The attorneys, independent accountants and others who will perform services for us will be retained by our general partner. Attorneys, independent accountants and others who will perform services for us will be selected by our general partner or our conflicts committee and may perform services for our general partner and its affiliates. We may retain separate counsel for ourselves or the holders of shares in the event of a conflict of interest between our general partner and its affiliates, on the one hand, and us or the holders of shares, on the other, depending on the nature of the conflict. We do not intend to do so in most cases.

Shareholders may have to repay distributions that were wrongfully distributed to them.

Under certain circumstances, shareholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware LP Act, we may not make a distribution to our shareholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

 

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While we believe we currently have effective internal control over financial reporting, we may identify a material weakness in our internal controls over financial reporting that could cause investors to lose confidence in the reliability of our financial statements and result in a decrease in the value of our Class A shares.

Our management is responsible for maintaining internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP.

We need to continuously maintain our internal control processes and systems and adapt them as our business grows and changes. This process is expensive, time-consuming and requires significant management attention. We cannot be certain that our internal control measures will continue to provide adequate control over our financial processes and reporting and ensure compliance with Section 404 of the Sarbanes-Oxley Act. Furthermore, as we grow our business or acquire other businesses, our internal controls may become more complex and we may require significantly more resources to ensure they remain effective. Failure to implement required new or improved controls, or difficulties encountered in their implementation, either in our existing business or in businesses that we may acquire, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm identify material weaknesses in our internal controls, the disclosure of that fact, even if quickly remedied, may cause investors to lose confidence in our financial statements and the trading price of our Class A shares may decline.

Remediation of a material weakness could require us to incur significant expense and if we fail to remedy any material weakness, our financial statements may be inaccurate, our ability to report our financial results on a timely and accurate basis may be adversely affected, our access to the capital markets may be restricted, the trading price of our Class A shares may decline, and we may be subject to sanctions or investigation by regulatory authorities, including the SEC or the NASDAQ. We may also be required to restate our financial statements from prior periods.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members and officers.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the listing requirements of the NASDAQ and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results and maintain effective disclosure controls and procedures and internal control over financial reporting. To maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future, which will increase our costs and expenses.

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our audit committee and compensation committee.

 

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We will incur increased costs as a result of being a publicly traded partnership.

We have no history operating as a publicly traded partnership. As a publicly traded partnership, we will incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002 and related rules subsequently implemented by the SEC and the NASDAQ have required changes in the corporate governance practices of publicly traded companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly traded partnership, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on our system of internal controls over financial reporting.

The NASDAQ does not require a publicly traded partnership like us to comply with certain of its corporate governance requirements.

We intend to apply for the quotation of our Class A shares on the NASDAQ. Because we will be a publicly traded limited partnership, the NASDAQ does not require us, and we do not intend to have, a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Additionally, any future issuance of additional partnership interests, including to affiliates, will not be subject to the NASDAQ’s shareholder approval rules that apply to a corporation. Accordingly, shareholders will not have the same protections afforded to certain corporations that are subject to all of the NASDAQ corporate governance requirements. Please read “Management—Management of 8point3 Partners.”

Risks Related to Taxation

In addition to reading the following risk factors, if the shareholder is a non-U.S. investor, please read “Certain U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders” for a more complete discussion of certain expected U.S. federal income and estate tax consequences of owning and disposing of our Class A shares.

Our future tax liability may be greater than expected if we do not generate NOLs sufficient to offset taxable income or if tax authorities challenge certain of our tax positions.

Even though we are organized as a limited partnership under state law, we will be treated as a corporation for U.S. federal income tax purposes and thus will be subject to U.S. federal income tax at regular corporate rates on our net taxable income. We expect to generate NOLs and NOL carryforwards that we can use to offset future taxable income. As a result, we do not expect to pay meaningful U.S. federal income tax for approximately              years. This estimate is based upon assumptions we have made regarding, among other things, OpCo’s income, capital expenditures and operating expenses. While we expect that our NOLs and NOL carryforwards will be available to us as a future benefit, in the event that they are not generated as expected, are successfully challenged by the Internal Revenue Service, or IRS, (in a tax audit or otherwise) or are subject to future limitations as described below, our ability to realize these benefits may be limited. Further, the IRS or other tax authorities could challenge one or more tax positions we or OpCo take, such as the classification of assets under the income tax depreciation rules, the characterization of expenses for income tax purposes, the extent to which sales, use or goods and services tax applies to operations in a particular state or the availability of property tax exemptions with respect to our projects, which could reduce the NOLs we generate. Further, any change in law may affect our tax position.

Our federal and state tax positions may be challenged by the relevant tax authority. The process and costs, including potential penalties for nonpayment of disputed amounts, of contesting such

 

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challenges, administratively or judicially, regardless of the merits, could be material. A reduction in our expected NOLs and NOL carryforwards, a limitation on our ability to use such losses, or other tax attributes, such as tax credits, and future tax audits or a challenge by tax authorities to our tax positions may result in a material increase in our estimated future income or other tax liabilities, which would negatively impact the amount of after-tax cash available for distribution to our Class A shareholders and our financial condition.

Our ability to use NOLs and NOL carryforwards to offset future income may be limited.

Our ability to use any NOLs generated by us could be substantially limited if we were to experience an “ownership change” as defined under Section 382 of the Internal Revenue Code of 1986, as amended, or Code. In general, an “ownership change” would occur if our “5-percent shareholders,” as defined under Section 382 of the Code, including certain groups of persons treated as “5-percent shareholders,” collectively increased their ownership in us by more than 50 percentage points over a rolling three-year period. An ownership change can occur as a result of a public offering of our Class A shares, as well as through secondary market purchases of our Class A shares and certain types of reorganization transactions. A corporation (including any entity that is treated as a corporation for U.S. federal income tax purposes) that experiences an ownership change will generally be subject to an annual limitation on the use of its pre-ownership change NOLs and NOL carryforwards (and certain other losses and/or credits) equal to the equity value of the corporation immediately before the ownership change, multiplied by the “long-term tax-exempt rate” (as determined by the IRS) for the month in which the ownership change occurs. Such a limitation could, for any given year, have the effect of increasing the amount of our U.S. federal income tax liability, which would negatively impact the amount of after-tax cash available for distribution to our Class A shareholders and our financial condition.

Distributions to Class A shareholders may be taxable as dividends.

Even though we are organized as a limited partnership under state law, we will be treated as a corporation for U.S. federal income tax purposes. Accordingly, if we make distributions from current or accumulated earnings and profits as computed for U.S. federal income tax purposes, such distributions will generally be taxable to Class A shareholders as ordinary dividend income for U.S. federal income tax purposes. Distributions paid to non-corporate U.S. shareholders will be subject to U.S. federal income tax at preferential rates, provided that certain holding period and other requirements are satisfied. We estimate that we will have limited earnings and profits for             or more years. However, it is difficult to predict whether we will generate earnings and profits as computed for U.S. federal income tax purposes in any given tax year, and although we expect that a portion of our distributions to Class A shareholders will exceed our current and accumulated earnings and profits as computed for U.S. federal income tax purposes and therefore constitute a non-taxable return of capital distribution to the extent of a shareholder’s basis in its Class A shares, this may not occur. In addition, although return-of-capital distributions are generally non-taxable to the extent of a shareholder’s basis in its Class A shares, such distributions will reduce the shareholder’s adjusted tax basis in its Class A shares, which will result in an increase in the amount of gain (or a decrease in the amount of loss) that will be recognized by the shareholder on a future disposition of our Class A shares, and to the extent any return-of-capital distribution exceeds a shareholder’s basis, such distributions will be treated as gain on the sale or exchange of the Class A shares.

 

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USE OF PROCEEDS

We expect to receive approximately $         million of net proceeds from the sale of Class A shares offered hereby based upon the assumed initial public offering price of $         per Class A share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discount, the structuring fee and offering expenses.

We intend to use all of the net proceeds of this offering to purchase              OpCo common units from OpCo, representing approximately     % of OpCo’s outstanding limited liability company interests after this offering. OpCo intends to use (i) approximately $         million of such net proceeds to make a cash distribution to First Solar, (ii) approximately $         million of such net proceeds to make a cash distribution to SunPower and (iii) approximately $         million of such net proceeds for general purposes, including to fund future acquisition opportunities.

If the underwriters exercise in full their option to purchase additional Class A shares, we estimate that the additional proceeds to us will be approximately $         million, after deducting the underwriting discount, the structuring fee and offering expenses. If and to the extent that the underwriters exercise their option to purchase additional Class A shares, the proceeds thereof will be used by us to purchase an equal number of common units of OpCo, and a number of additional OpCo common units and Class B shares equal to the number of Class A shares subject to the option not purchased by the underwriters will be issued to the Sponsors at the expiration of the option period for no additional consideration. OpCo will use the proceeds of any exercise of the underwriters’ option contributed to it to make an additional distribution to the Sponsors.

A $1.00 increase or decrease in the assumed initial public offering price of $         per Class A share after deducting the estimated underwriting discount, the structuring fee and offering expenses payable by us would increase or decrease the net proceeds to us from this offering by $         million, assuming the number of Class A shares offered by us, as set forth on the cover page of this prospectus, remains the same, which would affect the amount of proceeds distributed to our Sponsors accordingly.

In addition, we may also increase or decrease the number of Class A shares we are offering. Each increase or decrease of 1.0 million Class A shares offered by us, assuming an initial public offering price of $         per Class A share, would increase or decrease net proceeds to us from this offering by approximately $         million, resulting in a proportionate increase or decrease in the number of OpCo common units we will purchase, and a proportionate decrease or increase in the number of OpCo common units issued to our Sponsors.

 

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CAPITALIZATION

The following table sets forth our predecessor’s cash and cash equivalents and consolidated capitalization as of December 28, 2014, on: (i) a historical basis; (ii) a pro forma basis to give effect to the contribution by First Solar of the First Solar Project Entities; and (iii) on a pro forma basis to give effect to the Formation Transactions, borrowings under our new term loan facility and this offering, including the application of the net proceeds of this offering in the manner set forth under the heading “Use of Proceeds.”

You should read the following table in conjunction with the sections entitled “Use of Proceeds,” “Selected Historical and Pro Forma Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our predecessor’s combined financial statements and the accompanying notes included elsewhere in this prospectus.

 

     As of December 28, 2014  
     Predecessor      Pro Forma      Pro Forma
As Adjusted(1)
 
            (In thousands)  

Cash and cash equivalents

   $ —         $ —         $                
  

 

 

    

 

 

    

 

 

 

Indebtedness:

Existing debt or financing obligation

$ 91,183    $ 91,183    $     

New revolving credit facility(2)

  —        —     

New term loan facility(2)

  —        —     
  

 

 

    

 

 

    

 

 

 

Total debt(3)

  91,183      91,183   
  

 

 

    

 

 

    

 

 

 

Net Sponsor investment/partners’ capital:

Net First Solar investment

  —        421,672   

Net SunPower investment

  127,510      127,510   

Class A shares

  —        —     

Class B shares

  —        —     

Non-controlling Interest

  —        —     
  

 

 

    

 

 

    

 

 

 

Total net Sponsor investment/partners’ capital

  127,510      549,182   
  

 

 

    

 

 

    

 

 

 

Total capitalization

$ 218,693    $ 640,365    $     
  

 

 

    

 

 

    

 

 

 

 

(1) From the proceeds of this offering and our new term loan facility, the total distribution to our Sponsors of $         million was allocated     % to First Solar, or $         million, and     % to SunPower, or $         million.
(2) OpCo will enter into a new $         million revolving credit facility at the closing of this offering. OpCo will enter into a new $         million term loan facility at the closing of this offering.
(3) Excludes current portion of long-term debt of $         million.

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of Class A shares sold in this offering will exceed the pro forma net tangible book value per Class A share after this offering. Net tangible book value per Class A share as of a particular date represents the amount of our predecessor’s total tangible assets less our predecessor’s total liabilities divided by the total number of Class A shares outstanding as of such date. As of                     , 2015, after giving effect to the Formation Transactions, our net tangible book value would have been approximately $         million, or $         per Class A share, assuming that First Solar and SunPower exchanged all of their OpCo common units and OpCo subordinated units for newly issued Class A shares on a one-for-one basis. Purchasers of our Class A shares in this offering will experience substantial and immediate dilution in net tangible book value per Class A share as illustrated in the following table.

 

Assumed initial public offering price per Class A share

$                

Pro forma net tangible book value per Class A share before this offering(1)

Increase in as adjusted net tangible book value per Class A share attributable to purchasers in this offering

 

 

  

Pro forma net tangible book value per Class A share after this offering(2)

    

 

 

 

Immediate dilution in as adjusted net tangible book value per Class A share attributable to purchasers in this offering(2)

$     
    

 

 

 

 

(1) Gives effect to the Formation Transactions and assumes that our Sponsors exchanged all of their OpCo common units and OpCo subordinated units for newly issued Class A shares on a one-for-one basis as of                     , 2015.
(2) Assumes an initial public offering price of $         per Class A share, the midpoint of the price range set forth on the cover page of this prospectus. If the initial public offering price were to increase or decrease by $         per Class A share, then dilution in net tangible book value per Class A share would equal $         and $            , respectively.

Because our Sponsors and their affiliates will not own any Class A shares or other economic interests in us, we have presented dilution in net tangible book value per Class A share to investors in this offering assuming that our Sponsors exchanged their OpCo common units and OpCo subordinated units for newly issued Class A shares on a one-for-one basis in order to more meaningfully present the dilutive impact on the purchasers in this offering.

 

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The following table sets forth, as of                     , 2015, the differences among the number of Class A shares purchased, the total consideration paid or exchanged and the average price per Class A share paid by our Sponsors and by purchasers of our Class A shares in this offering, based on an assumed initial public offering price of $         per Class A share, that our Sponsors exchanged all of their OpCo common units and OpCo subordinated units for newly issued Class A shares on a one-for-one basis and no exercise of the underwriters’ option to purchase additional Class A shares.

 

          Total Consideration    Average
Price Per
Class A
Share
 
     Class A Shares Acquired    ($ in thousands)   
   Number    Percent    Amount      Percent   

First Solar(1)

         $                       $                

SunPower(2)

              

Purchasers in the offering

         $            $                

Total

         $           

 

(1) The projects contributed by First Solar in connection with this offering will be recorded at fair value. The fair value of the consideration to be provided by First Solar to OpCo in connection with this offering as of                     , 2015, was approximately $         million.
(2) The projects contributed by SunPower in connection with this offering will be recorded at carryover basis. The book value of the consideration to be provided by SunPower to OpCo in connection with this offering as of                     , 2015, was approximately $         million.

 

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OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

The following discussion of our cash distribution policy and estimated cash available for distribution contains certain assumptions and estimates relating to our future performance. Please read “—Assumptions and Considerations” below. You should read the following discussion in conjunction with “Forward-Looking Statements,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our predecessor’s financial statements and the notes included elsewhere in this prospectus.

General

Our Cash Distribution Policy

The board of directors of our general partner will adopt a cash distribution policy pursuant to which we intend to distribute at least the initial quarterly distribution of $         per Class A share ($         per share on an annualized basis) and OpCo will distribute at least the minimum quarterly distribution of $         per common and subordinated unit ($         per unit on an annualized basis), in each case to the extent we have sufficient cash after the establishment of cash reserves and the payment of our expenses, including payments to our general partner and its affiliates. We expect that if we are successful in executing our business strategy, we will grow our business in a steady and sustainable manner and distribute to our shareholders and OpCo’s unitholders a portion of any increase in our cash available for distribution resulting from such growth.

The board of directors of our general partner may change our distribution policy at any time and from time to time. Due to the substantial latitude our partnership agreement grants our general partner to spend cash or establish reserves, our partnership agreement does not require us to pay cash distributions on a quarterly or other basis.

Rationale for Our Cash Distributions

Our partnership agreement and OpCo’s limited liability company agreement require us and OpCo to distribute our available cash quarterly. Generally, our available cash is all cash on hand at the date of determination in respect of such quarter, less the amount of cash reserves established by our general partner. Our general partner has not caused us or OpCo to establish any cash reserves, and does not have any specific types of expenses for which it intends to establish reserves. We expect that our cash reserves would be established to provide for the payment of income taxes payable by 8point3 Partners, if any. We expect our general partner may cause OpCo to establish reserves for specific purposes, such as major capital expenditures or debt service payments, or may choose to generally reserve cash in the form of excess distribution coverage from time to time for the purpose of maintaining stability or growth in our quarterly distributions. In addition, our general partner may cause us to borrow amounts to fund distributions in quarters when we generate less cash than is necessary to sustain or grow our cash distributions per Class A share and OpCo common unit. Our cash flow is generated from distributions we receive from OpCo each quarter. OpCo’s cash flow is generated primarily from distributions from the Project Entities. As a result, our ability to make distributions to our Class A shareholders depends primarily on the ability of the Project Entities to make cash distributions to OpCo and the ability of OpCo to make cash distributions to its unitholders. We currently conduct no operations other than through our interest in OpCo and believe that our investors are best served by our distributing our available cash to our Class A shareholders as described below.

 

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Restrictions and Limitations on Our Cash Distributions and Our Ability to Change Our Cash Distribution Policy

It is possible that we may not receive quarterly distributions from OpCo and that our Class A shareholders may not receive quarterly distributions from us. Neither we nor OpCo have a legal obligation to pay any distributions. The requirements in our partnership agreement and the OpCo limited liability company agreement to distribute our respective available cash quarterly are subject to certain restrictions and limitations and may be changed at any time. These restrictions and limitations include the following:

 

    Our ability to make distributions to our Class A shareholders and OpCo’s ability to make distributions to its unitholders depends on the performance of our subsidiaries and their distribution of cash to us. The amount of cash that OpCo can distribute each quarter will be subject to restrictions on cash distributions under OpCo’s new revolving credit facility and term loan facility and restrictions contained in the governing documents of certain of OpCo’s subsidiaries. Should OpCo be unable to satisfy the restrictions included in such agreements, OpCo may be limited in its ability to make distributions to us and we may be limited in our ability to make distributions to our Class A shareholders. In addition, the ability of our subsidiaries to make distributions to us may be restricted by, among other things, the provisions of future indebtedness, applicable state partnership and limited liability company laws and other laws and regulations.

 

    Our general partner will have authority under our partnership agreement to establish cash reserves for us and OpCo. The establishment of those reserves could result in cash distributions to our Class A shareholders that are below our expectations. Any determination to establish cash reserves made by our general partner in good faith will be binding on our shareholders. Our partnership agreement provides that in order for a determination by our general partner to be considered to have been made in good faith, it must subjectively believe that the determination is in, or not adverse to, our best interests.

 

    OpCo will reimburse our general partner and its affiliates for all direct and indirect expenses they incur on our behalf, including out of pocket expenses incurred by our Sponsors and their affiliates for services provided to us under the Management Services Agreements, and there is no limit on the amount of such expenses that may be reimbursed. OpCo will also be required to pay an annual management fee to our Sponsors under the Management Services Agreements regardless of the impact on cash OpCo would otherwise have available for distribution to its unitholders, including us, which could reduce or eliminate our ability to pay distributions to our Class A shareholders.

 

    Under Section 18-607 of the Delaware Limited Liability Company Act, or the Delaware LLC Act, OpCo may not make a distribution to us and, under Section 17-607 of the Delaware LP Act, we may not make a distribution to our Class A shareholders if such distribution would cause OpCo’s or our liabilities to exceed the fair value of our respective assets, as applicable.

 

    OpCo may not have sufficient cash to pay distributions to its unitholders, including us, in any quarter due to cash flow shortfalls attributable to a number of operational, financial, commercial or other factors, including increases in G&A expenses, required payments of, or reserves for, principal and interest payments on indebtedness, working capital requirements and reserves for anticipated cash needs. OpCo’s cash available for distribution to its unitholders is directly impacted by the cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent such expenses increase.

 

    If and to the extent our and OpCo’s cash available for distribution materially declines, our general partner may elect to reduce our and OpCo’s quarterly cash distributions to service or repay indebtedness or fund capital expenditures.

 

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All available cash distributed by OpCo on any date from any source will be treated as distributed from operating surplus until the sum of all available cash distributed since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that distribution. However, operating surplus, as defined in the OpCo limited liability company agreement, includes certain components, including a $         million cash basket, that represent non-operating sources of cash. Accordingly, it is possible distributions that would otherwise be deemed as being made from capital surplus could be made from operating surplus. Any cash distributed by OpCo in excess of operating surplus will be deemed to be capital surplus under the OpCo limited liability company agreement. The OpCo limited liability company agreement treats a distribution of capital surplus as the repayment of the initial unit price on OpCo’s common units (equal to the initial public offering price), which is a return of capital. Each time a distribution of capital surplus is made, OpCo’s minimum quarterly distribution and target quarterly distribution levels will be reduced in the same proportion as the corresponding reduction in the unrecovered initial unit price (as defined below). We do not anticipate that OpCo will make any distributions from capital surplus. Please read “Provisions of Our Partnership Agreement and the OpCo Limited Liability Company Agreement Relating to Cash Distributions.”

Our Ability to Grow Our Business and Distributions

We intend to grow our business primarily through the acquisition of solar energy projects, which we believe will facilitate the growth of OpCo’s cash available for distribution to OpCo’s common unitholders, including us, and enable OpCo to increase its cash distributions per unit, enabling us to increase our cash distributions per Class A share, over time. However, the determination of the amount of cash distributions to be paid to holders of OpCo’s units will be made by our general partner and will depend upon OpCo’s financial condition, cash flow, results of operations, long-term prospects and any other matters that our general partner deems relevant.

We expect that we will rely primarily upon external financing sources, including commercial bank borrowings and issuances of debt and equity securities, to fund any growth capital expenditures, including any acquisitions of SunPower ROFO Projects, First Solar ROFO Projects, other Sponsor assets or assets from third parties. We do not have any commitment from our general partner or other affiliates, including our Sponsors, to provide any direct or indirect financial assistance to us following the closing of this offering. As a result, to the extent we are unable to finance growth externally, our cash distribution policy could significantly impair our ability to grow our business because we do not currently intend to reserve meaningful amounts of cash generated from operations to fund growth opportunities. If external financing is not available on acceptable terms, our general partner may decide to finance acquisitions with cash from operations, which would reduce or even eliminate cash available for distribution and our ability to pay distributions to holders of our Class A shares. To the extent we were to issue additional Class A shares to fund growth capital expenditures, we will be required to use the proceeds thereof to purchase an equal number of newly issued common units from OpCo, and the payment of distributions on those additional units may increase the risk that OpCo will be unable to maintain or increase its distributions per unit to OpCo’s common unitholders, including us. There are no limitations in our partnership agreement or the OpCo limited liability company agreement, and we expect there will be no limitations under OpCo’s new revolving credit facility and term loan, on our ability to issue additional shares or OpCo’s ability to issue additional OpCo units, including other classes of shares, partnership interests or units that would have priority with respect to the payment of distributions over our Class A shares or OpCo’s common units that we hold. Further, the incurrence of additional commercial bank borrowings or other debt to finance our growth would result in increased debt service obligations, which may reduce our cash available for distribution and our ability to pay distributions to holders of our Class A shares.

 

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Our Initial Quarterly Distribution

Upon the completion of this offering, our partnership agreement will provide for an initial quarterly distribution of $         per Class A share for each complete quarter, or $         per Class A share on an annualized basis, which is equal to OpCo’s minimum quarterly distribution. We intend to use the distributions we receive from OpCo, less any reserves established by our general partner, to pay regular quarterly distributions to holders of our Class A shares. Our ability to make cash distributions will be subject to the factors described above under “—General—Restrictions and Limitations on Our Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” Please read “Provisions of Our Partnership Agreement and the OpCo Limited Liability Company Agreement Relating to Cash Distributions.”

We will make quarterly distributions, if any, within 45 days after the end of each quarter, on or about the 15th day of each January, April, July and October to holders of record on or about the first day of each such month. If the distribution date does not fall on a business day, we will make the distribution on the first business day immediately following the indicated distribution date. We will adjust the amount of our distribution for the period from the completion of this offering through                     , 2015, based on the actual length of the period.

The amount of available cash we need to pay the initial quarterly distribution on all of our Class A shares that will be outstanding immediately after this offering for one quarter and on an annualized basis is summarized in the table below.

 

     No Exercise of
Underwriters’ Option to Purchase
Additional Class A Shares
     Full Exercise of
Underwriters’ Option to Purchase
Additional Class A Shares
 
            Aggregate Initial
Quarterly Distributions
            Aggregate Initial
Quarterly Distributions
 
(in millions)    Number of
Class A
Shares
     One
Quarter
     Annualized
(Four
Quarters)
     Number of
Class A
Shares
     One
Quarter
     Annualized
(Four
Quarters)
 

Class A shares(1)

      $         $            $         $     

Class B shares(2)

                                               

General partner interest(3)

                                               
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$      $      $      $     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The total number of our Class A shares held by public shareholders will be equal to the total number of OpCo’s common units held by us.
(2) Our Class B shares are not entitled to distributions.
(3) Our general partner owns a non-economic general partner interest.

 

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Minimum Quarterly Distribution of OpCo

Upon the completion of this offering, the OpCo limited liability company agreement will provide for a minimum quarterly distribution of $         per unit for each complete quarter, or $         per unit on an annualized basis. OpCo will adjust the amount of its distribution for the period from the completion of this offering through                     , 2015, based on the actual length of the period. Assuming: (i) that our general partner does not establish any reserves, including reserves for income taxes payable by 8point3 Partners; and (ii) that neither we nor OpCo issues additional classes of equity securities, the per unit cash distributions we receive from OpCo will be equal to the per share cash distributions received by our Class A shareholders. The amount of available cash OpCo needs to pay the minimum quarterly distribution on all of OpCo’s common and subordinated units, in each case to be outstanding immediately after this offering, for one quarter and on an annualized basis is summarized in the table below.

 

     No Exercise of
Underwriters’ Option to Purchase
Additional Class A Shares
     Full Exercise of
Underwriters’ Option to Purchase
Additional Class A Shares
 
            Aggregate Minimum
Quarterly Distributions
            Aggregate Minimum
Quarterly Distributions
 
(in millions)    Number of
Units
     One
Quarter
     Annualized
(Four
Quarters)
     Number of
Units
     One
Quarter
     Annualized
(Four
Quarters)
 

OpCo common units held by us

      $         $            $         $     

OpCo common units held by our Sponsors

                 

OpCo subordinated units held by our Sponsors

                 

Managing Member interest(1)

                                               
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$      $      $      $     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) We own a non-economic managing member interest.

Holdings will also hold the incentive distribution rights in OpCo, which entitle it to increasing percentages, up to an aggregate maximum of 50 percent, of the cash OpCo distributes in excess of $         per unit per quarter. Please read “Provisions of Our Partnership Agreement and the OpCo Limited Liability Company Agreement Relating to Cash Distributions—Incentive Distribution Rights.”

Our partnership agreement requires us to distribute all available cash each quarter; however, the actual amount of our available cash for any quarter is subject to fluctuations based on the amount of cash we generate from our business, the amount of our expenses and the amount of reserves our general partner establishes in accordance with our partnership agreement and the OpCo limited liability company agreement, respectively.

In the following sections, we present in detail the basis for our belief that we will be able to fully fund our annualized initial quarterly distribution of $         per share for the twelve-month period ending                     , 2016 and $         per share for the twelve-month period ending                     , 2017. In those sections, we present two tables, consisting of:

 

    “Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 28, 2014,” in which we present the amount of cash we would have had available for distribution on a pro forma basis for the year ended December 28, 2014, as adjusted to give effect to the Formation Transactions, including this offering; and

 

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    “Estimated Cash Available for Distribution for the Twelve-Month Periods Ending August 31, 2016 and August 31, 2017,” in which we present a forecast of cash available for distribution for us to pay our initial quarterly distribution on all of our Class A shares for the twelve-month periods ending August 31, 2016 and August 31, 2017.

Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 28, 2014

On a pro forma basis, assuming we had completed this offering and related transactions as of December 30, 2013, OpCo’s cash available for distribution would have been $         million for the year ended December 28, 2014, which would have allowed it to pay     % of the minimum quarterly distribution of $         per unit ($         per unit on an annualized basis) on the OpCo common units and no distribution on the OpCo subordinated units, and which would have allowed us to pay     % of the initial quarterly distribution of $         per share on the Class A shares, in each case giving no effect to the distribution forbearance.

Our calculation of unaudited pro forma cash available for distribution reflects an annual management fee equal to $         payable by OpCo to First Solar and $         payable by OpCo to SunPower under the respective management services agreements for the provision of certain management and administrative services. Following this offering, we estimate that we will incur $         million of incremental fees and expenses as a result of becoming a publicly traded partnership, including costs associated with SEC reporting requirements, independent auditor fees, investor relations activities, stock exchange listing, registrar and transfer agent fees, director and officer liability insurance and director compensation. These incremental fees and expenses are not reflected in our pro forma financial statements and will be borne by OpCo. The table below assumes that our general partner has not established any reserves, including any reserves for the payment of our income taxes, and our calculation of unaudited pro forma cash available for distribution does not include a full year of revenues from projects that commenced commercial operations after the beginning of the relevant period. We currently do not expect that we will pay meaningful federal income tax for a period of approximately         years. As a result, we have assumed that all cash distributed by OpCo to us will be distributed to our Class A shareholders as shown in the table below. The table below also assumes that our general partner has not established any reserves for the proper conduct of OpCo’s business, including any reserves to provide for future cash distributions to OpCo’s unitholders, including us. The establishment of such reserves by our general partner could result in a reduction in cash distributions that we would otherwise receive from OpCo in a quarter, which in turn could result in a reduction in cash distributions to our Class A shareholders.

We have based the pro forma assumptions upon currently available information and estimates. The pro forma amounts below do not purport to present the results of our operations had this offering and the related transactions contemplated in this prospectus actually been completed as of the date indicated. As a result, the amount of pro forma cash available for distribution should only be viewed as a general indicator of the amount of cash available for distribution that we might have generated had we been formed and completed the transactions contemplated in this prospectus on December 30, 2013.

 

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The following table illustrates, on a pro forma basis for the year ended December 28, 2014, the amount of cash that would have been available for distribution to OpCo’s unitholders, including us, and to our shareholders, assuming the Formation Transactions had been completed on December 30, 2013. Certain of the adjustments are explained in further detail in the footnotes to such adjustments.

 

$ in thousands

   Year Ended
December 28,
2014
 

Pro forma net income of OpCo

   $                

Depreciation

  

Interest expense

  

Income tax expense (benefit)

  
  

 

 

 

Pro forma EBITDA of OpCo

Less:

Equity in earnings of unconsolidated affiliates

Cash interest paid

Cash income taxes paid

Maintenance capital expenditures

Expansion capital expenditures

Principal amortization of indebtedness

Incremental G&A expenses associated with being a publicly traded partnership

Add:

Cash distributions from unconsolidated affiliates

Cash proceeds from sales-type residential leases

Cash proceeds from issuance of debt, net of issuance costs to fund expansion capital expenditures

Capital contributed by sponsors to fund expansion capital expenditures

  

 

 

 

Pro forma cash available for distribution to OpCo unitholders

$     
  

 

 

 

Distributions to common unitholders of OpCo at the minimum quarterly distribution annualized rate of $         per unit

$     

Distributions to 8point3 Partners

Distributions to First Solar and SunPower common units

Distributions to First Solar and SunPower subordinated units

Pro Forma Shortfall of cash available for distribution by OpCo below aggregate annualized minimum quarterly distribution

  

 

 

 

Distributions to Class A shareholders of 8point3 Partners at the initial quarterly distribution annualized rate of $         per share

$     

Percent of the initial quarterly distribution to Class A shareholders that can be paid

  

 

 

 

 

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Estimated Cash Available for Distribution for the Twelve-Month Periods

Ending August 31, 2016 and August 31, 2017

We forecast that OpCo’s estimated cash available for distribution during the twelve-month period ending August 31, 2016, will be approximately $         million and during the twelve-month period ending August 31, 2017, will be approximately $         million. These amounts would exceed by $         million and by $         million the amount needed to pay OpCo’s minimum quarterly distribution of $         per unit and $         per unit on all of OpCo’s common and subordinated units for the twelve-month periods ending August 31, 2016 and August 31, 2017, respectively, and exceed by $         million and by $         million the amount needed to pay our initial quarterly distribution of $         per unit on all of our Class A shares for the twelve-month periods ending August 31, 2016 and August 31, 2017, respectively. Our forecast assumes that we will distribute all of the cash we receive from OpCo for the twelve-month periods ending August 31, 2016 and August 31, 2017, to our Class A shareholders. The assumption is based on the fact that we do not expect our general partner to establish any reserves during the forecast period that would reduce our cash available for distribution to our Class A shareholders.

We are providing this forecast of estimated cash available for distribution to supplement the historical financial statements of our predecessor and our unaudited pro forma financial statements included elsewhere in the prospectus in support of our belief that, based on the assumptions stated herein, including the incorporation of the effects of the distribution forbearance to which our Sponsors have agreed, we should have sufficient cash available for distribution to allow OpCo to make distributions at the minimum quarterly distribution rate on all of OpCo’s common and subordinated units for the twelve-month periods ending August 31, 2016 and August 31, 2017, and allow us to make distributions at the initial quarterly distribution rate on all of our Class A shares for the twelve-month periods ending August 31, 2016 and August 31, 2017. Please read “—Assumptions and Considerations” for further information as to the assumptions we have made for the forecast. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” for information as to the accounting policies we have followed for the financial forecast.

Our forecast is a forward-looking statement and reflects our judgment as of the date of this prospectus of our current outlook and expectations for the twelve-month periods ending August 31, 2016 and August 31, 2017. It should be read together with the historical combined financial statements of our predecessor and the accompanying notes thereto included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We do not typically make public projections as to future earnings or other operating results. However, management has prepared this forecast to present the estimated cash available for distribution to our Class A shareholders for the twelve-month periods ending August 31, 2016 and August 31, 2017. This forecast was not prepared with a view toward public disclosure or with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to forecasted financial information, but, in the view of management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, our expected future financial performance. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the forecasted financial information.

Neither our independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the forecasted financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the forecasted financial information.

 

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We believe our actual results of operations during the twelve-month periods ending August 31, 2016 and August 31, 2017, will be consistent with our forecast, but our forecasted results may not be achieved. If our estimates are not achieved, OpCo may not be able to pay the minimum quarterly distribution or any distribution and we may not be able to pay the initial quarterly distribution or any distribution on our Class A shares.

The assumptions and estimates underlying our forecast, as described below under “—Assumptions and Considerations,” are inherently uncertain and, although we consider them reasonable as of the date of this prospectus, they are subject to a wide variety of significant business, economic, financial and competitive risks and uncertainties that could cause actual results to differ materially from those contained in our forecast, including the risks and uncertainties described in “Risk Factors.” Accordingly, our forecast may not be indicative of our future performance and actual results may differ materially from those presented in this forecast. Inclusion of this forecast in this prospectus should not be regarded as a representation by any person that the results contained in this forecast can or will be achieved.

We do not undertake any obligation to release publicly the results of any future revisions we may make to our forecast or to update our financial forecast or the assumptions used to prepare our forecast to reflect events or circumstances after the completion of this offering. In light of this, our forecast should not be regarded as a representation by us, the underwriters or any other person that we will make such distribution. Therefore, you are cautioned not to place undue reliance on this information.

For additional information relating to the principal assumptions used in preparing our forecast please read “—Assumptions and Considerations” below.

 

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Estimated Cash Available for Distribution

 

In thousands

   Twelve-Month
Period Ending
August 31, 2016
     Twelve-Month
Period Ending
August 31, 2017
 

Operating revenues of OpCo

   $                    $                

Operating costs and expenses:

     

Cost of operations

     

General and administrative

     

Depreciation

     

Total operating costs expenses

     
  

 

 

    

 

 

 

Operating income

  

 

 

    

 

 

 

Other (income) expense:

  

 

 

    

 

 

 

Interest expense

Total other (income) expense

  

 

 

    

 

 

 

Income before income taxes

  

 

 

    

 

 

 

Income tax expense

Equity in earnings of unconsolidated affiliates

Net income

  

 

 

    

 

 

 

Add:

Depreciation

Interest expense

Income tax expense

EBITDA of OpCo

Less:

Equity in earnings of unconsolidated affiliates

Cash interest paid

Cash income taxes paid

Maintenance capital expenditures

Cash distributions to non-controlling interests

Principal amortization of indebtedness

Add:

Cash distributions from unconsolidated affiliates

Cash proceeds from sales-type residential leases

  

 

 

    

 

 

 

Estimated cash available for distribution to OpCo unitholders

$      $     
  

 

 

    

 

 

 

Distributions to common unitholders of OpCo at the minimum quarterly distribution annualized rate of $         per unit

$      $     

Distributions to 8point3 Partners

Distributions to First Solar and SunPower common units

Distributions to First Solar and SunPower subordinated units

Excess of cash available for distribution by OpCo over aggregate annualized minimum quarterly distribution

Distributions to Class A shareholders of 8point3 Partners at the initial quarterly distribution annualized rate of $         per share

Percent of the initial quarterly distribution to Class A shareholders that can be paid

 

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PROVISIONS OF OUR PARTNERSHIP AGREEMENT AND THE OPCO LIMITED LIABILITY COMPANY AGREEMENT RELATING TO CASH DISTRIBUTIONS

We will distribute our available cash, as defined below, in each quarter to our Class A shareholders. Our cash flow is generated from distributions we receive from OpCo. As a result, our ability to make distributions to our Class A shareholders depends primarily on the ability of OpCo to make cash distributions to its unitholders, including us. Set forth below is a summary of the significant provisions of our partnership agreement and the OpCo limited liability company agreement as they relate to cash distributions. The summary below is qualified in its entirety by reference to all of the provisions of our partnership agreement and the OpCo limited liability company agreement, a form of each of which has been attached as an appendix to this prospectus.

As described below under “—Provisions of the OpCo Limited Liability Company Agreement Relating to Cash Distributions,” our general partner will have broad discretion to make certain decisions under the OpCo limited liability company agreement, including with respect to the establishment of cash reserves. Decisions made by us under the OpCo limited liability company agreement will ultimately be made by our general partner.

Provisions of Our Partnership Agreement Relating to Cash Distributions

Distributions of Our Available Cash

Our partnership agreement requires that, within 45 days after the end of each fiscal quarter, beginning with the quarter ending                     , 2015, we distribute all of our available cash to Class A shareholders of record on the applicable record date. We will adjust the amount of our distributions for the period from the completion of this offering through                     , 2015, based on the actual length of the period.

Our partnership agreement requires us to distribute our available cash quarterly. Generally, our available cash is all cash on hand or received before the date of distribution in respect of such quarter, less the amount of cash reserves established by our general partner. We currently expect that cash reserves at 8point3 Partners would be established solely to provide for the payment of income taxes payable by 8point3 Partners, if any. Our cash flow is generated from distributions we receive from OpCo.

Even though we are organized as a limited partnership under state law, we will be treated as a corporation for U.S. federal income tax purposes. Accordingly, we will be subject to U.S. federal income tax at regular corporate rates on our net taxable income. We expect to generate NOLs and NOL carryforwards that we can use to offset future taxable income. As a result, we do not expect to pay meaningful U.S. federal income tax for approximately         years. This estimate is based on assumptions we have made regarding, among other things, OpCo’s income, capital expenditures and operating expense. We may not generate NOLs as expected. Accordingly, our future tax liability may be greater than expected which would reduce cash available for distribution. Please read “Risk Factors—Risks Related to Taxation.”

Shares Eligible for Distribution

Upon the completion of this offering, we will have              Class A shares outstanding and Class B shares outstanding. Each Class A share will be entitled to receive distributions (including upon liquidation) on a pro rata basis. Class B shares will not be entitled to receive any distributions. We may issue additional units to fund the redemption of OpCo common units and our Class B shares tendered by our Sponsors under the Exchange Agreement. Please read “Certain Relationships and Related Party Transactions—Exchange Agreement.”

 

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General Partner Interest

Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may in the future own Class A shares or other equity securities in us and would be entitled to receive cash distributions on any such interests.

Distributions of Cash Upon Liquidation

If we dissolve in accordance with our partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors and distribute any remaining proceeds pro rata to our Class A shareholders.

Intent to Distribute the Initial Quarterly Distribution

We intend for our initial quarterly distribution to the holders of our Class A shares to be at least $ per share, or $         per share on an annualized basis, which is equal to OpCo’s minimum quarterly distribution on OpCo’s common units. However, our ability to pay the initial quarterly distribution will depend on the amount of distributions we received from OpCo, as a holder of OpCo’s common units.

Even if we receive sufficient cash from OpCo to pay the initial quarterly distribution, our ability to pay the initial quarterly distribution will also depend on whether we have sufficient remaining cash after the establishment of cash reserves as determined by our general partner. Consequently, we may not be able to pay the initial quarterly distribution on our Class A shares in any quarter, even if the minimum quarterly distribution on the OpCo common units has been paid in full.

Provisions of the OpCo Limited Liability Company Agreement Relating to Cash Distributions

Distributions of Available Cash by OpCo

General

The OpCo limited liability company agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ending                     , 2015, OpCo will distribute its available cash to its unitholders of record on the applicable record date. OpCo will adjust the amount of its distribution for the period from the completion of this offering to                     , 2015, based on the actual length of the period.

Definition of Available Cash

Available cash generally means, for any quarter, the sum of all cash and cash equivalents on hand at the end of that quarter:

 

    less, the amount of cash reserves established by our general partner to:

 

    provide for the proper conduct of OpCo’s business, including reserves for anticipated future debt service requirements, future capital expenditures and future acquisitions, subsequent to that quarter;

 

    comply with applicable law or any of OpCo’s or its subsidiaries’ debt instruments or other agreements; or

 

    provide funds for distributions to OpCo’s unitholders for any one or more of the next four quarters, provided that 8point3 Partners may not establish cash reserves for future distributions if the effect of the establishment of such reserves will prevent OpCo from making the minimum quarterly distribution on all OpCo common units and any cumulative arrearages on such OpCo common units for the current quarter;

 

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    plus, all cash on hand on the date of determination resulting from dividends or distributions received after the end of the quarter from equity interests in any person other than a subsidiary in respect of operations conducted by such person during the quarter;

 

    plus, if our general partner so determines, all or any portion of the cash on hand on the date of determination of available cash resulting from working capital borrowings after the end of such quarter.

The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to cause OpCo to use cash from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to OpCo’s unitholders. Under the OpCo limited liability company agreement, working capital borrowings are generally borrowings under a credit facility, commercial paper facility or similar financing arrangement, and in all cases are used solely for working capital purposes or to pay distributions to partners, and with the intent of the borrower to repay such borrowings within 12 months with funds other than from additional working capital borrowings.

Intent to Distribute the Minimum Quarterly Distribution

We intend to cause OpCo to pay a minimum quarterly distribution to the holders of OpCo’s common units, including us, and OpCo’s subordinated units of $         per unit, or $         per unit on an annualized basis, to the extent OpCo has sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including (i) expenses of our general partner and its affiliates, (ii) our expenses, and (iii) payments to our Sponsors and their affiliates under the Management Services Agreements. However, OpCo may not be able to pay the minimum quarterly distribution on its units in any quarter. Since we will own all of the non-economic managing member interest of OpCo, determinations made by OpCo will ultimately be made by our general partner. Please read “Certain Relationships and Related Party Transactions” for a discussion of the restrictions in OpCo’s new revolving credit facility and term loan facility that may restrict its ability to make distributions.

Incentive Distribution Rights

Holdings currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 50%, of the cash OpCo distributes from operating surplus (as defined below) in excess of $ per unit per quarter. The maximum distribution of 50% does not include any distributions that Holdings or its affiliates may receive on OpCo common or subordinated units that they own. Please read “—Incentive Distribution Rights” below for additional information.

Operating Surplus and Capital Surplus

General

All cash distributed to OpCo unitholders will be characterized as either being paid from “operating surplus” or “capital surplus.” OpCo will treat distributions of available cash from operating surplus differently than distributions of available cash from capital surplus.

Operating Surplus

Operating surplus of OpCo is defined as:

 

    $         million (as described below); plus

 

   

all of OpCo and its subsidiaries’ cash receipts after the closing of this offering, excluding cash from interim capital transactions (as defined below), provided that cash receipts from the

 

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termination of certain hedges prior to their specified termination date will be included in operating surplus in equal quarterly installments over the remaining scheduled life of such hedges; plus

 

    all of OpCo and its subsidiaries’ cash receipts after the closing of this offering resulting from dividends or distributions received after the end of the quarter from equity interests in any person other than a subsidiary in respect of operations conducted by such person during the quarter (excluding the proceeds received by OpCo from interim capital transactions by such person); plus

 

    cash distributions, including incremental distributions on incentive distribution rights, paid in respect of equity issued, other than equity issued in this offering, to finance all or a portion of expansion capital expenditures in respect of the period from the date that OpCo or a subsidiary enter into a binding obligation to commence the construction, development, replacement, improvement or expansion of a capital asset and ending on the earlier to occur of the date the capital asset commences commercial service and the date that it is abandoned or disposed of; plus

 

    cash distributions, including incremental distributions on incentive distribution rights, paid in respect of equity issued, other than equity issued in this offering, to pay interest and related fees on debt incurred, or to pay distributions on equity issued, to finance the expansion capital expenditures referred to in the prior bullet point; less

 

    all of OpCo and its subsidiaries’ operating expenditures, after the closing of this offering; less

 

    the amount of cash reserves established by our general partner or the boards of any of OpCo’s subsidiaries to provide funds for future operating expenditures; less

 

    all working capital borrowings not repaid within 12 months after having been incurred, or repaid within such 12-month period with the proceeds of additional working capital borrowings; less

 

    any cash loss realized on disposition of an investment capital expenditure.

Disbursements made, cash received (including working capital borrowings) or cash reserves established, increased or reduced after the end of a period but on or before the date on which cash or cash equivalents will be distributed with respect to such period shall be deemed to have been made, received, established, increased or reduced, for purposes of determining operating surplus, within such period if our general partner so determines.

As described above, operating surplus does not reflect actual cash on hand that is available for distribution by OpCo and is not limited to cash generated by our operations. For example, the definition of operating surplus includes a provision that will enable OpCo to distribute as operating surplus up to $         million of cash that OpCo receives in the future from non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. As a result, OpCo may distribute as operating surplus up to such amount of any cash that it receives from non-operating sources. In addition, the effect of including certain cash distributions on equity interests in operating surplus, as described above, will be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.

The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures that reduce operating surplus at the time of repayment. However, if OpCo does not repay working capital borrowings, which increase operating surplus, during the 12-month period following the borrowing, they will be deemed to have been repaid at the end of such period, thus decreasing operating surplus at that time. When the

 

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working capital borrowings are subsequently repaid, they will not be treated as a further reduction in operating surplus because operating surplus will have been previously reduced by the deemed repayment.

Interim capital transactions are defined as:

 

    borrowings, including sales of debt securities and other incurrences of indebtedness for borrowed money, other than working capital borrowings;

 

    sales of equity securities;

 

    sales or other dispositions of assets, other than sales or other dispositions of inventory, accounts receivable and other assets in the ordinary course of business and sales or other dispositions of assets as part of normal asset retirements or replacements; and

 

    capital contributions received.

Operating expenditures are defined as:

 

    all cash expenditures of OpCo and its subsidiaries, including taxes, compensation of officers and directors of our general partner, reimbursements of expenses of our general partner and its affiliates, payments made under certain hedge contracts (provided that payments made in connection with the termination of any such hedge contract prior to the expiration of its settlement or termination date specified therein will be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such hedge contract and amounts paid in connection with the initial purchase of such a contract will be amortized at the life of such contract), maintenance capital expenditures (as described below), and repayment of working capital borrowings; and

 

    all of our expenses and other cash expenditures (other than income taxes), including reimbursements of expenses of our general partner and its affiliates as set forth in the Management Services Agreements.

Notwithstanding the foregoing, operating expenditures will not include:

 

    repayments of working capital borrowings where such borrowings have previously been deemed to have been repaid, as described above;

 

    payments, including prepayments and prepayment penalties and the purchase price of indebtedness that is repurchased and cancelled, of principal of and premium on indebtedness other than working capital borrowings and principal amortization payments under financing arrangements of OpCo’s subsidiaries;

 

    expansion capital expenditures or investment capital expenditures, as described below;

 

    payment of transaction expenses, including taxes, relating to interim capital transactions;

 

    distributions to equityholders of OpCo; or

 

    repurchases of equity interests, including repurchases or redemptions of equity interests under the Exchange Agreement and excluding repurchases of equity interests purchased to satisfy obligations under employee benefit plans.

Capital Surplus

Capital surplus is defined in the OpCo limited liability company agreement as any distribution of available cash in excess of its cumulative operating surplus. Accordingly, except as described above, capital surplus would generally be generated by interim capital transactions.

 

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Characterization of Cash Distributions

The OpCo limited liability company agreement requires that it treat all available cash distributed as coming from operating surplus until the sum of all available cash distributed since the closing of this offering (other than any distributions of proceeds of this offering) equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that distribution. The OpCo limited liability company agreement requires that OpCo treat any amount distributed in excess of operating surplus, regardless of the source, as capital surplus. We do not anticipate that OpCo will make any distributions from capital surplus.

Capital Expenditures

Expansion capital expenditures are cash expenditures incurred for those acquisitions or capital improvements that are expected to increase OpCo’s operating capacity or operating income over the long term. Examples of expansion capital expenditures include the acquisition of equipment or additional solar energy projects to the extent such capital expenditures are expected to increase OpCo’s operating capacity or its operating income. Expansion capital expenditures include interest expense associated with borrowings used to fund expansion capital expenditures.

Maintenance capital expenditures are cash expenditures that are made to repair, refurbish and maintain equipment reliability, integrity and safety and to comply with applicable laws and regulations, or other cash expenditures that are made to maintain, over the long term, operating capacity or operating income. Examples of maintenance capital expenditures are expenditures to repair, refurbish or replace OpCo’s solar energy projects, to upgrade transmission networks, to maintain equipment reliability, integrity and safety and to comply with laws and regulations.

Investment capital expenditures are those capital expenditures, including transaction expenses, which are neither maintenance capital expenditures nor expansion capital expenditures. Investment capital expenditures largely will consist of cash expenditures made for investment purposes. Examples of investment capital expenditures include traditional cash expenditures for investment purposes, such as purchases of securities, as well as other cash expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of an asset for investment purposes or development of assets that are in excess of the maintenance of our existing operating capacity or net income, but which are not expected to expand, for more than the short term, our operating capacity or net income.

As described above, neither investment capital expenditures nor expansion capital expenditures are operating expenditures, and thus will not reduce operating surplus. Because expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of an acquisition, development or expansion in respect of a period that begins when we enter into a binding obligation for an acquisition, construction, development or expansion and ends on the earlier to occur of the date on which such acquisition, construction, development or expansion commences commercial service and the date that it is abandoned or disposed of, such interest payments do not reduce operating surplus. Losses on disposition of an investment capital expenditure will reduce operating surplus when realized and cash receipts from an investment capital expenditure will be treated as a cash receipt for purposes of calculating operating surplus only to the extent the cash receipt is a return on principal.

Cash expenditures that are made in part for maintenance capital purposes, investment capital purposes or expansion capital purposes will be allocated as maintenance capital expenditures, investment capital expenditures or expansion capital expenditures by our general partner.

 

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Subordination Period

General

The OpCo limited liability company agreement provides that, during the subordination period (which we define below), the OpCo common units will have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to $         per OpCo common unit, which amount is defined in the OpCo limited liability company agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the OpCo common units from prior quarters, before any distributions of available cash from operating surplus may be made on the OpCo subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the OpCo subordinated units will not be entitled to receive any distributions from operating surplus until the OpCo common units have received the minimum quarterly distribution from operating surplus for such quarter plus any arrearages from prior quarters. Furthermore, no arrearages will accrue or be payable on the OpCo subordinated units. The practical effect of the OpCo subordinated units is to increase the likelihood that, during the subordination period, there will be available cash from operating surplus to be distributed on the OpCo common units and our Class A shares.

Subordination Period

Except as described below, the subordination period will begin on the closing date of this offering and expire on the first business day after the distribution to OpCo’s unitholders in respect of any quarter, beginning with the quarter ending                     , 2018, if each of the following has occurred:

 

    for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date, aggregate distributions from operating surplus equaled or exceeded the sum of the minimum quarterly distribution multiplied by the total number of OpCo common and subordinated units outstanding for each quarter of each period;

 

    for the same three consecutive, non-overlapping four-quarter periods, the “adjusted operating surplus” (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distribution multiplied by the total number of OpCo common and subordinated units outstanding during each quarter on a fully diluted weighted average basis; and

 

    there are no arrearages in payment of the minimum quarterly distribution on the OpCo common units.

For the period after closing of this offering through                     , 2015, the OpCo limited liability company agreement will prorate the minimum quarterly distribution based on the actual length of the period, and use such prorated distribution for all purposes, including in determining whether the test described above has been satisfied.

Early Termination of Subordination Period

Notwithstanding the foregoing, the subordination period will automatically terminate, and all of the OpCo subordinated units will convert into OpCo common units on a one-for-one basis, on the first business day after the distribution to unitholders in respect of any quarter, beginning with the quarter ending                     , 2016, if each of the following has occurred:

 

    for the four-quarter period immediately preceding that date, aggregate distributions from operating surplus exceeded the product of 150.0% of the minimum quarterly distribution multiplied by the total number of OpCo common and subordinated units outstanding in each quarter in the period;

 

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    for the same four-quarter period, the “adjusted operating surplus” equaled or exceeded the product of 150.0% of the minimum quarterly distribution multiplied by the total number of OpCo common and subordinated units outstanding during each quarter on a fully diluted weighted average basis, plus the related distribution on the incentive distribution rights; and

 

    there are no arrearages in payment of the minimum quarterly distributions on the OpCo common units.

Forbearance Period

Our Sponsors have agreed to forego any distributions declared on their common and subordinated units of OpCo during the forbearance period. The amount of distributions to be foregone by the Sponsors will be $             million per fiscal quarter (or $             million if the underwriters exercise their option to purchase additional units in full) assuming OpCo distributes the minimum quarterly distribution. The purpose of this forbearance is to reduce the risk that the holders of Class A shares will not receive the full initial quarterly distribution as a result of certain solar energy projects not reaching COD until after the closing of the offering. The “forbearance period” will end in the fiscal quarter commencing on or after March 1, 2016 that the board of directors of our general partner, with the concurrence of the conflicts committee, determines that OpCo will be able to earn and pay at least the minimum quarterly distribution on each of its outstanding common and subordinated units for such quarter and the successive quarter. During the forbearance period, our Sponsors’ common and subordinated units in OpCo will not be treated as outstanding for purposes of calculating whether the subordination period has ended.

Conversion Upon Removal of the General Partner

In addition, if our shareholders remove our general partner other than for cause the OpCo subordinated units held by any person will immediately and automatically convert into OpCo common units on a one-for-one basis; provided that (i) neither such person nor any of its affiliates voted any of its units in favor of the removal and (ii) such person is not an affiliate of the successor general partner.

Expiration of the Subordination Period

When the subordination period ends, each outstanding OpCo subordinated unit will convert into one OpCo common unit and will thereafter participate pro rata with the other OpCo common units in distributions of available cash.

Adjusted Operating Surplus

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net drawdowns of reserves of cash established in prior periods. Adjusted operating surplus for a period consists of:

 

    operating surplus generated with respect to that period (excluding any amounts attributable to the item described in the first bullet point under the caption “—Operating Surplus and Capital Surplus—Operating Surplus” above); less

 

    any net increase in working capital borrowings (including OpCo’s share of any net increase in working capital borrowings by subsidiaries that are not wholly owned) with respect to that period; less

 

    any net decrease in cash reserves for operating expenditures (including OpCo’s share of any net decrease in cash reserves by subsidiaries that are not wholly owned) with respect to that period not relating to an operating expenditure made with respect to that period; plus

 

    any net decrease in working capital borrowings with respect to that period; plus

 

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    any net increase in cash reserves for operating expenditures (including OpCo’s share of any net increase in cash reserves by subsidiaries that are not wholly owned) with respect to that period required by any debt instrument for the repayment of principal, interest or premium; plus

 

    any net decrease made in subsequent periods to cash reserves for operating expenditures with respect to that period to the extent such decrease results in a reduction in adjusted operating surplus in subsequent periods.

Any disbursements made, cash received (including working capital borrowings) or cash reserves established, increased or reduced after the end of a period that the general partner determines to include in operating surplus for such period shall also be deemed to have been made, received or established, increased or reduced in such period for purposes of determining adjusted operating surplus for such period.

Distributions of Available Cash from Operating Surplus During the Subordination Period

OpCo will make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:

 

    first, 100% to the OpCo common unitholders, pro rata, until OpCo distributes for each outstanding OpCo common unit an amount equal to the minimum quarterly distribution for that quarter;

 

    second, 100% to the OpCo common unitholders, pro rata, until OpCo distributes for each outstanding OpCo common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the OpCo common units for any prior quarters during the subordination period;

 

    third, 100% to the OpCo subordinated unitholders, pro rata, until OpCo distributes for each outstanding OpCo subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

 

    thereafter, in the manner described in “—Incentive Distribution Rights” below.

Distributions of Available Cash from Operating Surplus After the Subordination Period

OpCo will make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:

 

    first, 100% to the OpCo common unitholders, pro rata, until OpCo distributes for each outstanding OpCo common unit an amount equal to the minimum quarterly distribution for that quarter; and

 

    thereafter, in the manner described in “—Incentive Distribution Rights” below.

Incentive Distribution Rights

Incentive distribution rights represent the right to receive an increasing percentage (15%, 25% and 50%) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Holdings currently holds the incentive distribution rights, but may transfer these rights.

If for any quarter:

 

    OpCo has distributed available cash from operating surplus to the OpCo common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and

 

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    OpCo has distributed available cash from operating surplus on outstanding OpCo common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

then, OpCo will distribute any additional available cash from operating surplus for that quarter among the unitholders and the holder(s) of the incentive distribution rights in the following manner:

 

    first, 100% to all unitholders, pro rata, until each unitholder receives a total of $         per unit for that quarter (the “first target distribution”);

 

    second, 85% to all unitholders, pro rata, and 15% to the holder(s) of the incentive distribution rights, until each unitholder receives a total of $        per unit for that quarter (the “second target distribution”);

 

    third, 75% to all unitholders, pro rata, and 25% to the holder(s) of the incentive distribution rights, until each unitholder receives a total of $ per unit for that quarter (the “third target distribution”); and

 

    thereafter, 50% to all unitholders, pro rata, and 50% to the holder(s) of the incentive distribution rights.

Percentage Allocations of Available Cash From Operating Surplus

The following table sets forth the percentage allocations of available cash from operating surplus between Holdings (in respect of the incentive distribution rights) and OpCo’s unitholders (in respect of their common and subordinated units) based on the specified target quarterly distribution levels. The amounts set forth under “Marginal Percentage Interest in Available Cash” are the percentage interests of Holdings (in respect of the incentive distribution rights) and the OpCo unitholders (in respect of their common and subordinated units) in any available cash from operating surplus OpCo distributes up to and including the corresponding amount in the column “Total Quarterly Distribution per Unit Target Amount.” The percentage interests shown for OpCo’s unitholders and Holdings for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution.

 

            Marginal Percentage
Interest in Available Cash
 
     Total Quarterly
Distribution per Unit
Target Amount
     Unitholders     Incentive
Distribution
Right
 

Minimum Quarterly Distribution

   $           100.0     0.0

First Target Distribution

   above $          up to $                 100.0     0.0

Second Target Distribution

   above $          up to $                 85.0     15.0

Third Target Distribution

   above $          up to $                 75.0     25.0

Thereafter

   above $           50.0     50.0

Holdings’ Right to Reset Incentive Distribution Levels

Holdings, as the initial holder of OpCo’s incentive distribution rights, has the right under the OpCo limited liability company agreement, subject to certain conditions, to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the minimum quarterly distribution amount and target distribution levels upon which the incentive distribution payments would be set. If Holdings transfers all or a portion of the incentive distribution rights in the future, then the holder or holders of a majority of the incentive distribution rights will be entitled to exercise this right. Holdings’ right to reset the minimum quarterly distribution

 

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amount and the target distribution levels upon which the incentive distributions are based may be exercised, without approval of our Class A shareholders or the conflicts committee, at any time when there are no OpCo subordinated units outstanding, OpCo has made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distributions for each of the four consecutive fiscal quarters immediately preceding such time and the amount of such aggregate distributions did not exceed the adjusted operating surplus for such four-quarter period. If Holdings and its affiliates are not the holders of a majority of the incentive distribution rights at the time an election is made to reset the minimum quarterly distribution amount and the target distribution levels, then the proposed reset will be subject to the prior written concurrence of our general partner that the conditions described above have been satisfied. The reset minimum quarterly distribution amount and target distribution levels will be higher than the minimum quarterly distribution amount and the target distribution levels prior to the reset such that Holdings will not receive any incentive distributions under the reset target distribution levels until cash distributions per unit following this event increase as described below. We anticipate that Holdings would exercise this reset right in order to facilitate acquisitions or internal expansion projects that would otherwise not be sufficiently accretive to cash distributions per OpCo common unit, taking into account the existing levels of incentive distribution payments being made to Holdings.

In connection with the resetting of the minimum quarterly distribution amount and the target distribution levels and the corresponding relinquishment by Holdings of incentive distribution payments based on the target distributions prior to the reset, Holdings will be entitled to receive a number of newly issued OpCo common units based on a formula described below that takes into account the “cash parity” value of the average cash distributions related to the incentive distribution rights received by Holdings for the two quarters immediately preceding the reset event as compared to the average cash distributions per OpCo common unit during that two-quarter period.

The number of OpCo common units that Holdings (or the then holder of the incentive distribution rights, if other than Holdings) would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels then in effect would be equal to the quotient determined by dividing (x) the average aggregate amount of cash distributions received by Holdings in respect of its incentive distribution rights during the two consecutive fiscal quarters ended immediately prior to the date of such reset election by (y) the average of the aggregate amount of cash distributed per OpCo common unit during each of these two quarters.

Following a reset election, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount per OpCo common unit for the two fiscal quarters immediately preceding the reset election (which amount we refer to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to be correspondingly higher such that we would distribute all of our available cash from operating surplus for each quarter thereafter as follows:

 

    first, 100% to all unitholders, pro rata, until each unitholder receives an amount equal to 150% of the reset minimum quarterly distribution for that quarter;

 

    second, 85% to all unitholders, pro rata, and 15% to Holdings, until each unitholder receives an amount per unit equal to 175% of the reset minimum quarterly distribution for the quarter;

 

    third, 75% to all unitholders, pro rata, and 25% to Holdings, until each unitholder receives an amount per unit equal to 200% of the reset minimum quarterly distribution for the quarter; and

 

    thereafter, 50% to all unitholders, pro rata, and 50% to Holdings.

 

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The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and the holder(s) of the incentive distribution rights at various cash distribution levels (i) pursuant to the cash distribution provisions of the OpCo limited liability company agreement in effect at the completion of this offering, as well as (ii) following a hypothetical reset of the minimum quarterly distribution and target distribution levels based on the assumption that the average quarterly cash distribution amount per OpCo common unit during the two fiscal quarters immediately preceding the reset election was $            .

 

    Quarterly Distribution
per Unit Prior to Reset
    Marginal Percentage
Interest in Distribution
    Quarter Distribution
per Unit Following
Hypothetical Reset
 
    Common
Unitholders
    Incentive
Distribution
Rights
   

Minimum Quarterly Distribution

    $                      100            $                 

First Target Distribution

    above $                  up to $                     100            above $                    up to $             (1) 

Second Target Distribution

    above $                  up to $                     85     15     above $             (1)      up to $             (2) 

Third Target Distribution

    above $                  up to $                     75     25     above $             (2)      up to $             (3) 

Thereafter

    above $                      50     50     above $             (3)   

 

(1) This amount is 150% of the hypothetical reset minimum quarterly distribution.
(2) This amount is 175% of the hypothetical reset minimum quarterly distribution.
(3) This amount is 200% of the hypothetical reset minimum quarterly distribution.

The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and the holder(s) of the incentive distribution rights based on an average of the amounts distributed for the two quarters immediately prior to the reset. The table assumes that immediately prior to the reset there would be            OpCo common units outstanding and the average distribution to each OpCo common unit would be $        per quarter for the two consecutive non-overlapping quarters prior to the reset.

 

     Prior to Reset  
     Quarterly
Distribution
per Unit
     Cash
Distributions
to Common
Units
     Cash
Distributions
to

Incentive
Distribution
Rights
     Total
Distributions
 

Minimum Quarterly Distribution

   $                       $                    $                    $                

First Target Distribution

   above $                    up to $                         

Second Target Distribution

   above $                    up to $                         

Third Target Distribution

   above $                    up to $                         

Thereafter

   above $                       $                    $                    $                
        

 

 

    

 

 

    

 

 

 
         $                    $                    $                
        

 

 

    

 

 

    

 

 

 

 

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The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and the holder(s) of the incentive distribution rights after a reset of the incentive distribution rights, with respect to the quarter after the reset occurs. The table reflects that as a result of the reset there would be         OpCo common units outstanding and that the average distribution to each OpCo common unit would be $            . The number of OpCo common units issued as a result of the reset was calculated by dividing (x) $         as the average of the amounts received in respect of the incentive distribution rights for the two consecutive non-overlapping quarters prior to the reset as shown in the table above, by (y) the average of the cash distributions made on each OpCo common unit per quarter for the two consecutive non-overlapping quarters prior to the reset as shown in the table above, or $            .

 

    After Reset  
                Cash
Distributions
to Common
Units
    Cash Distributions to
Holder(s) of the Incentive
Distribution Rights
       
  Quarterly
Distribution
per Unit
      Common
Units
Issued in
Reset
    Incentive
Distribution
Rights
    Total     Total
Distributions
 

Minimum Quarterly Distribution

    $                    $                   $                   $                   $                   $                

First Target Distribution

    above $                  up to $                          

Second Target Distribution

    above $                  up to $                          

Third Target Distribution

    above $                  up to $                          

Thereafter

    above $                    $                   $                   $                   $                   $                
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      $                   $                   $                   $                   $                
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The holder(s) of the Incentive Distribution Rights will be entitled to cause the minimum quarterly distribution amount and the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for the immediately preceding four consecutive fiscal quarters based on the highest level of incentive distributions that it is entitled to receive under the OpCo limited liability company agreement.

Distributions from Capital Surplus

How Distributions from Capital Surplus Will Be Made

OpCo will make distributions of available cash from capital surplus, if any, in the following manner:

 

    first, 100% to all unitholders until the minimum quarterly distribution is reduced to zero, as described below under “—Effect of a Distribution from Capital Surplus;”

 

    second, to the common unitholders, pro rata, until OpCo distributes for each common unit an amount from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and

 

    thereafter, as if such distributions were from operating surplus; because the minimum quarterly distribution is reduced to zero, OpCo will pay the incentive distribution rights at the highest level as described below.

The preceding discussion is based on the assumption that OpCo does not issue additional classes of equity securities.

 

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Effect of a Distribution from Capital Surplus

The OpCo limited liability company agreement treats a distribution of capital surplus as the repayment of the initial unit price on OpCo common units (equal to the initial public offering price), which is a return of capital. The initial unit price less any distributions of capital surplus per unit is referred to as the “unrecovered initial unit price.” Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target quarterly distribution levels will be reduced in the same proportion as the distribution had to the fair market value of the OpCo common units prior to the announcement of the distribution. Any distribution of capital surplus before the unrecovered initial unit price is reduced to zero cannot be applied to the payment of the minimum quarterly distribution.

Once OpCo distributes capital surplus on an OpCo common unit in an amount equal to the initial unit price, the minimum quarterly distribution and the target quarterly distribution levels will be equal to zero. OpCo will then pay any unpaid arrearages on OpCo’s common units and thereafter make all future distributions from operating surplus, with 50% being paid to the unitholders, pro rata, and 50% being paid to the holders of incentive distribution rights, pro rata. Please read “—Incentive Distribution Rights” above.

Adjustment to the Minimum Quarterly Distribution and Target Quarterly Distribution Levels

In addition to adjusting the minimum quarterly distribution and target quarterly distribution levels to reflect a distribution of capital surplus, if OpCo combines its units into fewer units or subdivide its units into a greater number of units, it will proportionately adjust:

 

    the minimum quarterly distribution;

 

    target quarterly distribution levels;

 

    the unrecovered initial unit price; and

 

    the arrearages per OpCo common unit in payment of the minimum quarterly distribution on the OpCo common units.

For example, if a two-for-one split of the OpCo common units should occur, the minimum quarterly distribution, the target distribution levels and the unrecovered initial unit price would each be reduced to 50% of its initial level, and each OpCo subordinated unit would be split into two units. OpCo will not make any adjustment by reason of the issuance of additional units for cash or property.

Distributions of Cash Upon Liquidation

General

If OpCo dissolves in accordance with the OpCo limited liability company agreement, OpCo will sell or otherwise dispose of its assets in a process called liquidation. OpCo will first apply the proceeds of liquidation to the payment of its creditors. OpCo will distribute any remaining proceeds to its unitholders and holders of incentive distribution rights in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of outstanding OpCo common units to a preference over the holders of outstanding OpCo subordinated units upon OpCo’s liquidation, to the extent required to permit OpCo common unitholders to receive their unrecovered initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of the minimum quarterly distribution on the OpCo common units. However, there may not be sufficient gain upon OpCo’s liquidation to enable the holders of OpCo common units to fully recover all of these amounts, even though there may be cash available for distributions to the holders of OpCo subordinated units. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights of Holdings.

 

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Manner of Adjustments for Gain

The manner of the adjustment for gain is set forth in the OpCo limited liability company agreement. If OpCo’s liquidation occurs before the end of the subordination period, OpCo will allocate any gain to its members in the following manner:

 

    first, to each member to the extent of any negative balance in its capital account;

 

    second, 100% to the OpCo common unitholders, pro rata, until the capital account for each OpCo common unit is equal to the sum of: (i) the unrecovered initial unit price; (ii) the amount of the minimum quarterly distribution for the quarter during which OpCo’s liquidation occurs; and (iii) any unpaid arrearages in payment of the minimum quarterly distribution;

 

    third, 100% to the OpCo subordinated unitholders, pro rata, until the capital account for each OpCo subordinated unit is equal to the sum of: (i) the unrecovered initial unit price; and (ii) the amount of the minimum quarterly distribution for the quarter during which OpCo’s liquidation occurs;

 

    fourth, 100% to all OpCo common and subordinated unitholders, pro rata, until we allocate under this bullet an amount per unit equal to: (i) the sum of the excess of the first target distribution per unit over the minimum quarterly distribution per unit for each quarter of OpCo’s existence; less (ii) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the minimum quarterly distribution per unit that OpCo distributed 100% to the OpCo common and subordinated unitholders, pro rata, for each quarter of its existence;

 

    fifth, 85% to all OpCo common and subordinated unitholders, pro rata, and 15% to Holdings, until OpCo allocates under this bullet an amount per unit equal to: (i) the sum of the excess of the second target distribution per unit over the first target distribution per unit for each quarter of OpCo’s existence; less (ii) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the first target distribution per unit that OpCo distributed 85% to the OpCo common and subordinated unitholders, pro rata, and 15% to Holdings for each quarter of OpCo’s existence;

 

    sixth, 75% to all OpCo common and subordinated unitholders, pro rata, and 25% to Holdings, until OpCo allocates under this bullet an amount per unit equal to: (i) the sum of the excess of the third target distribution per unit over the second target distribution per unit for each quarter of OpCo’s existence; less (ii) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the second target distribution per unit that OpCo distributed 75% to the common and subordinated unitholders, pro rata, and 25% to Holdings for each quarter of OpCo’s existence; and

 

    thereafter, 50% to all OpCo common and subordinated unitholders, pro rata, and 50% to Holdings.

The percentages set forth above are based on the assumption that Holdings has not transferred its incentive distribution rights and has not previously exercised its right to reset incentive distribution levels.

If the liquidation occurs after the end of the subordination period, the distinction between OpCo common units and subordinated units will disappear, so that clause (iii) of the second bullet point above and all of the fourth bullet point above will no longer be applicable.

 

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Manner of Adjustments for Losses

If OpCo’s liquidation occurs before the end of the subordination period, after making allocations of loss to the members in a manner intended to offset in reverse order the allocations of gains that have previously been allocated, OpCo will generally allocate any loss to its members in the following manner:

 

    first, 100% to the holders of OpCo subordinated units in proportion to the positive balances in their capital accounts, until the capital accounts of the OpCo subordinated unitholders have been reduced to zero; and

 

    thereafter, 100% to the holders of OpCo common units in proportion to the positive balances in their capital accounts, until the capital accounts of the OpCo common unitholders have been reduced to zero.

If the liquidation occurs after the end of the subordination period, the distinction between OpCo common units and subordinated units will disappear, so that all of the first bullet point above will no longer be applicable.

Adjustments to Capital Accounts

The OpCo limited liability company agreement requires that OpCo make adjustments to capital accounts upon the issuance of additional units. In this regard, the OpCo limited liability company agreement specifies that OpCo allocate any unrealized and, for tax purposes, unrecognized gain resulting from the adjustments to the unitholders and incentive distribution rights in the same manner as OpCo allocates gain upon liquidation. In the event that OpCo makes positive adjustments to the capital accounts upon the issuance of additional units, the OpCo limited liability company agreement requires that OpCo generally allocate any later negative adjustments to the capital accounts resulting from the issuance of additional units or upon our liquidation in a manner which results, to the extent possible, in the members’ capital account balances equaling the amount which they would have been if no earlier positive adjustments to the capital accounts had been made. In contrast to the allocations of gain, and except as provided above, OpCo generally will allocate any unrealized and unrecognized loss resulting from the adjustments to capital accounts upon the issuance of additional units to the unitholders and incentive distribution rights based on their respective percentage ownership of OpCo. In this manner, prior to the end of the subordination period, OpCo generally will allocate any such loss equally with respect to the OpCo common and subordinated units. If OpCo makes negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional units will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in OpCo’s unitholders’ capital account balances equaling the amounts they would have been if no earlier adjustments for loss had been made.

 

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

The following table sets forth selected combined carve-out financial data of our predecessor and selected pro forma financial data of 8point3 Energy Partners LP as of and for the periods indicated. The combined carve-out financial statements of our predecessor as of and for the years ended December 28, 2014 and December 29, 2013, appearing elsewhere in this prospectus were prepared on a “carve-out” basis which comprises contracted solar energy projects and leased solar energy systems that have historically been owned by SunPower. The predecessor is not an existing stand-alone legal entity; rather it is a combination of currently operating leased solar energy systems and solar energy projects currently under construction that have long-term offtake agreements, all of which are currently owned by SunPower. The combined carve-out financial statements are intended to represent the financial results during those periods of SunPower’s contracted solar energy projects and leased solar energy systems in the United States that will be contributed to OpCo as part of the Formation Transactions. The following selected historical combined carve-out financial and operating data presents all of the projects and operations of our predecessor.

Upon the completion of this offering, we will own a controlling non-economic managing member interest in OpCo, and a     % limited liability company interest in OpCo (assuming no exercise of the underwriters’ option to purchase additional Class A shares) and our Sponsors will collectively own a non-controlling     % limited liability company interest in OpCo (assuming no exercise of the underwriters’ option to purchase additional Class A shares). However, as required by U.S. GAAP, we will continue to consolidate 100% of the assets and operations of OpCo in our financial statements and reflect a non-controlling interest.

The selected unaudited pro forma financial data has been derived by the application of pro forma adjustments to the historical combined carve-out financial statements of our predecessor included elsewhere in this prospectus. The pro forma balance sheet assumes that the Formation Transactions and this offering occurred as of December 28, 2014 and the pro forma statements of operations data for the year ended December 28, 2014 assume that the Formation Transactions and this offering, with respect to share and per share information, occurred as of December 30, 2013.

The unaudited pro forma condensed combined financial statements reflect the following significant assumptions and Formation Transactions related to this offering:

 

    the contribution by First Solar of the First Solar Project Entities in exchange for an aggregate of              Class B shares,              OpCo common units,              OpCo subordinated units and the right to receive a portion of the proceeds of this offering;

 

    the issuance by us of             Class A shares in this offering for net proceeds of $            ;

 

    the use by us of all of the net proceeds of this offering to purchase from OpCo             OpCo common units, resulting in our owning a             % interest in OpCo;

 

    the issuance by us of an aggregate of             Class B shares and the issuance by OpCo of an aggregate of             OpCo common units and             OpCo subordinated units and the issuance to SunPower in connection with the reorganization of OpCo;

 

    the issuance by OpCo of all of the incentive distribution rights to Holdings;

 

    the use by OpCo of the proceeds it receives from us to make a distribution to First Solar of $        and to make a distribution to SunPower of $        , with the remaining proceeds OpCo receives from us to be used for general purposes, including to fund future acquisition opportunities;

 

    the incurrence of a $        term loan by OpCo under a term loan facility and the distribution of the proceeds thereof to the Sponsors; and

 

    the entrance into a $         million revolving credit facility by OpCo.

 

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The pro forma financial data does not give effect to the estimated $         million in incremental annual G&A expense we expect to incur as a result of being a publicly traded company.

The combined carve-out financial statements of our predecessor, from which the selected unaudited pro forma financial data have been derived, are presented in U.S. dollars and have been prepared in accordance with U.S. GAAP.

8point3 Partners has not yet commenced operations and has no significant assets or liabilities.

The following table should be read together with, and is qualified in its entirety by reference to, the combined carve-out financial statements and the accompanying notes included elsewhere in this prospectus. Among other things, the combined carve-out financial statements include more detailed information regarding the basis of presentation for the information in the following table. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. Our selected unaudited pro forma financial information does not purport to represent what our results of operations or financial position would have been if we operated as a publicly traded partnership during the period presented and may not be indicative of our future performance.

 

     Pro Forma
As Adjusted
     Historical  
(In thousands)    Year Ended
December 28,
2014
     Year Ended
December 28,
2014
    Year Ended
December 29,
2013
 

Statement of Operations Data:

       

Revenues:

       

Operating revenues

   $                   $ 9,231      $ 24,489   
  

 

 

    

 

 

   

 

 

 

Total revenues

        9,231        24,489   

Operating costs and expenses:

       

Cost of operations

        (3,195     13,111   

Cost of operations-parent

        937        928   

Selling, general and administrative

        4,818        4,272   

Depreciation, amortization and accretion

        2,339        3,224   
  

 

 

    

 

 

   

 

 

 

Total operating costs and expenses

        4,899        21,535   
  

 

 

    

 

 

   

 

 

 

Operating income (loss)

        4,332        2,954   

Interest expense

        5,525        6,751   
  

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

        (1,193     (3,797

Benefit from (provision for) income taxes

        (23     (30
  

 

 

    

 

 

   

 

 

 

Net income (loss)

        (1,216     (3,827

Less net income (loss) attributable to noncontrolling interests

                 
  

 

 

    

 

 

   

 

 

 

Net income (loss) attributable to 8point3 Partners

   $        $ (1,216 )   $ 3,827  
  

 

 

    

 

 

   

 

 

 

Basic net income per share

   $         
  

 

 

      

Balance Sheet Data (at period end):

       

Property and equipment, net

   $        $ 158,208      $ 100,010   

Total assets

   $        $ 247,969      $ 200,565   

Long-term debt and financing obligations

   $        $ 91,183      $ 31,545   

Total equity

   $        $ 127,510      $ 139,933   

Cash Flow Data:

       

Net cash provided by (used in)

       

Operating activities

      $ 10,476      $ 5,380   

Investing activities

      $ (63,906   $ (8,082

Financing activities

      $  53,430      $  2,702   

Other Financial Data:

       

EBITDA(1)

   $         $ 6,671      $ 6,178   

 

(1) For a discussion of the non-U.S. GAAP financial measures EBITDA, please read “Prospectus Summary—Summary Historical and Pro Forma Financial Data—Non-U.S. GAAP Financial Measures.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of the historical financial condition and results of operations of our predecessor in conjunction with the historical and pro forma financial statements and the related notes to those financial statements included elsewhere in this prospectus. This discussion includes forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ from statements we make. Please read “Forward-Looking Statements” and “Risk Factors.”

The contributions of the Project Entities by the Sponsors to OpCo will result in a business combination for accounting purposes, with the SunPower Project Entities being considered as the acquirer of the First Solar Project Entities. We have determined that the SunPower Project Entities are the accounting acquirer since SunPower has appointed our chief executive officer for at least the first two years and the expected contribution of the SunPower Project Entities is somewhat larger than the contribution of the First Solar Project Entities. Therefore, our predecessor is the SunPower Project Entities. As a result, the following discussion principally analyzes the historical financial condition and results of operations of the SunPower Project Entities. However, since the First Solar Project Entities will be a material portion of our Initial Portfolio, we have included a supplemental discussion of the historical financial condition and results of operations of the First Solar Project Entities.

The historical combined carve-out financial statements of our predecessor as of and for the years ended December 28, 2014 and December 29, 2013 appearing elsewhere in this prospectus were prepared on a “carve-out” basis from SunPower and are intended to represent the financial condition and results of operations of the SunPower Project Entities during those periods. The historical combined financial statements of the First Solar Project Entities as of and for the years ended December 31, 2014 and December 31, 2013 appearing elsewhere in this prospectus were prepared on a “carve-out” basis from First Solar and are intended to represent the financial condition and results of operations of the First Solar Project Entities during those periods.

We will own a controlling non-economic managing member interest and a     % limited liability company interest in OpCo and our Sponsors will collectively own a non-controlling     % limited liability company interest in OpCo. Because we will consolidate OpCo, financial results are shown on a 100% basis and are not adjusted to reflect our Sponsors’ non-controlling limited liability company interest in OpCo.

Overview

Company Description

We are a growth-oriented limited partnership formed by First Solar and SunPower to own, operate and acquire solar energy generation projects. Upon completion of this offering, our Initial Portfolio, which we will acquire from our Sponsors, will have interests in 432 MW of solar energy projects. Our primary objective is to generate predictable cash distributions that grow at a sustainable rate. We intend to achieve this objective by acquiring high-quality solar assets primarily developed by our Sponsors that generate long-term contracted cash flows and serve utility, C&I and residential customers in the United States and other select markets, primarily within the countries that comprise the OECD.

Upon the completion of this offering, we will own interests in six utility-scale solar energy projects, four of which are operational and two of which are in late-stage construction. These assets will represent 87% of the generating capacity of our Initial Portfolio upon all projects attaining COD. We will also own interests in a portfolio of C&I and residential DG Solar assets, which will represent 13% of the

 

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generating capacity of our Initial Portfolio. Our Initial Portfolio is located entirely in the United States and consists of utility-scale and C&I assets that sell substantially all of their output under long-term, fixed-price offtake agreements with investment grade offtake counterparties and residential DG Solar assets that are leased under long-term fixed-price offtake agreements with high credit quality residential customers with FICO scores averaging 765 at the time of the initial contract. As of December 31, 2014, the weighted average remaining life of offtake agreements across our Initial Portfolio was 21.3 years.

How We Will Generate Revenues

Our revenues are a function of the volume of electricity generated and sold by our projects and rental payments under lease agreements. The assets in our Initial Portfolio sell substantially all of their output or are leased under long-term, fixed price offtake agreements with investment grade utility-scale and C&I offtakers, as well as high credit quality residential customers with an average FICO score of 765 at the time of initial contract. As of December 31, 2014, the weighted average remaining life of offtake agreements across our Initial Portfolio was 21.3 years, with our Utility Project Entities’ offtake agreements having remaining terms ranging from 18.3 to 28.7 years and our C&I offtake agreements and residential offtake agreements having remaining terms ranging from 16.0 to 20.0 years.

Under our Utility Project Entities’ offtake agreements, each Utility Project Entity generally receives a fixed price over the term of the offtake agreement with respect to 100% of its output, subject to certain adjustments. Our Utility Project Entities’ offtake agreements have certain availability or production requirements, and if such requirements are not met, then in some cases the applicable project is required to pay the offtake counterparty a specified damages amount, and in some cases the offtake counterparty has the right to terminate the offtake agreement or reduce the contract quantity. In addition, under our utility offtake agreements, each party typically has the right to terminate upon written notice ranging from ten to 60 days following the occurrence of an event of default that has not been cured within the applicable cure period, if any.

Under our C&I Project Entities’ offtake agreements, each C&I Project Entity generally receives a fixed price over the term of the offtake agreement with respect to 100% of its output, subject to certain adjustments. Certain of our C&I Project Entities’ offtake agreements have availability or production requirements, and if such requirements are not met, the offtake counterparty has the right to terminate the offtake agreement. Under our C&I Project Entities’ offtake agreements, each party typically has the right to terminate upon written notice ranging from ten to 30 days following the occurrence of an event of default that has not been cured within the applicable cure period, if any.

Under our Residential Portfolio Project Entity’s offtake agreements, homeowners are obligated to make lease payments to the Residential Portfolio Project Entity on a monthly basis. The customer’s monthly payment is fixed based on a calculation that takes into account expected solar energy generation, and certain of our current offtake agreements contain price escalators with an average of a 1% increase annually. Customers are eligible to purchase the leased solar systems to facilitate the sale or transfer of their home. The agreements also include an early buy-out option at fair market value exercisable in the seventh year that allows customers to purchase the solar system.

How We Intend to Evaluate Our Operations

Our management intends to use a variety of financial metrics to analyze our performance. The key financial metrics we will evaluate are EBITDA and cash available for distribution.

EBITDA.    We define EBITDA as net income plus interest expense, income tax expense, and depreciation and amortization. EBITDA is a non-U.S. GAAP financial measure. This measurement is not recognized in accordance with U.S. GAAP and should not be viewed as an alternative to U.S. GAAP measures of performance. The U.S. GAAP measure most directly comparable to EBITDA is net

 

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income. The presentation of EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. For a further discussion of the non-U.S. GAAP financial measure of EBITDA and a reconciliation of EBITDA to its most comparable financial measures calculated and presented in accordance with U.S. GAAP, please read “Prospectus Summary—Summary Historical and Pro Forma Financial Data—Non-U.S. GAAP Financial Measures.”

Cash Available for Distribution.    Although we have not quantified cash available for distribution on a historical basis, after the closing of this offering, we intend to use cash available for distribution, which we define as EBITDA less equity in earnings of unconsolidated affiliates, cash interest paid, cash income taxes paid, maintenance capital expenditures, cash distributions to non-controlling interests and principal amortization of indebtedness plus cash distributions from unconsolidated affiliates and cash proceeds from sales-type residential leases. Our cash flow is generated from distributions we receive from OpCo each quarter. OpCo’s cash flow is generated primarily from distributions from the Project Entities. As a result, our ability to make distributions to our Class A shareholders depends primarily on the ability of the Project Entities to make cash distributions to OpCo and the ability of OpCo to make cash distributions to its unitholders.

We believe cash available for distribution is useful to investors in evaluating our operating performance because securities analysts and other interested parties use such calculations as a measure of our ability to make our minimum quarterly distribution. In addition, cash available for distribution is used by our management team for determining future acquisitions and managing our growth. The U.S. GAAP measures most directly comparable to cash available for distribution are net income and net cash provided by operating activities.

However, cash available for distribution has limitations as an analytical tool because it does not capture the level of capital expenditures necessary to maintain the operating performance of our projects, does not include changes in operating assets and liabilities and excludes the effect of certain other cash flow items, all of which could have a material effect on our financial condition and results from operations. Cash available for distribution is a non-U.S. GAAP measure and should not be considered an alternative to net income, net cash provided by (used in) operating activities or any other performance or liquidity measure determined in accordance with U.S. GAAP, nor is it indicative of funds available to fund our cash needs. In addition, our calculations of cash available for distribution is not necessarily comparable to cash available for distribution as calculated by other companies. Investors should not rely on these measures as a substitute for any U.S. GAAP measure, including net income or net cash provided by operating activities.

Items Affecting the Comparability of Our Financial Results

Our future results of operations will not be comparable to our historical results of operations for the reasons described below.

Formation Transactions.    At the closing of this offering, we will acquire the First Solar Project Entities, which are not included in the results of our predecessor. Following the completion of this offering, our future combined financial statements will include the financial condition and results of operations of the First Solar Project Entities.

Non-operating Assets.    Results of operations of our predecessor mainly relate to our Residential Portfolio, which represents less than 10% of the assets in our Initial Portfolio. None of the SunPower Utility and C&I Projects have yet begun operation and the First Solar Projects, which are relatively new or have not yet begun operations, are not included in our predecessor’s results of operations.

 

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General and Administrative Expense.    Our G&A expenses historically included direct charges for certain overhead and shared services expenses allocated by SunPower. Allocations for G&A services included such items as information technology, legal, human resources and other financial and administrative services. These expenses were charged or allocated to our predecessor based on management’s estimate of proportional use. Following the closing of this offering, under our management services agreements, we will pay an annual fee, initially $          million, to our Sponsors for general and administrative services. This annual management fee will be subject to annual adjustment to reflect the cost to provide G&A services to us. For more information about this term fee and the services covered by it, please read “Certain Relationships and Related Party Transactions—Management Services Agreement.”

Accounting for Joint Ventures.    Our historical combined carve-out financial statements do not include equity earnings from any minority-owned joint ventures. At the closing of this offering, OpCo will own a 49% interest in the Solar Gen 2 Project and a noncontrolling interest in the Lost Hills Blackwell Project and the North Star Project; however, as these projects are currently owned by First Solar, they are not included in our predecessor’s combined carve-out financial statements. The results of operations of joint ventures in which OpCo owns a meaningful noncontrolling interest will not be consolidated in our financial statements and instead will be represented as earnings from equity investments.

Financing.    Our predecessor’s historical combined carve-out financial statements reflect indebtedness for the Quinto Project, which will be paid off in connection with the closing of this offering, and two residential financing agreements with third party investors, both of which will have been terminated by the closing of this offering. Concurrently with the completion of this offering, OpCo will enter into a $         million term loan facility and a $         million revolving credit facility. We expect OpCo to borrow $         under the term loan facility. We will use the proceeds of the term loan to pay distributions to our Sponsors. Please read “—Significant Factors and Trends Affecting Our Business—Liquidity and Capital Resources.”

Expiration of Section 1603 Cash Grant Program.    Our predecessor’s combined carve-out financial statements reflect the effect of the federal Section 1603 cash grant program. This program has expired and after the closing of this offering we will no longer benefit from these cash grants.

Maryland Solar Lease Arrangement.    Upon or shortly after consummation of this offering, the Maryland Solar Project Entity will lease the Maryland Solar Project to an affiliate of First Solar. Under the arrangement, the lessee is expected to be obligated to pay a fixed amount of rent. Please read “Certain Relationships and Related Party Transactions—Maryland Solar Lease Arrangement.”

Change in Fiscal Year.    Historically, our predecessor’s fiscal year was a 52-to-53-week fiscal year that ends on the Sunday closest to December 31. After the closing of this offering, we expect to change our fiscal year to a fiscal year ending November 30.

Significant Factors and Trends Affecting Our Business

The assets in our Initial Portfolio sell substantially all of their output or are leased pursuant to long-term, fixed price offtake agreements. We believe these long-term agreements substantially mitigate volatility in our cash flows. Over time, our results of operations and our ability to grow our business could be impacted by a number of factors and trends that affect our industry generally, including the development of the ROFO Portfolio and the other projects we may acquire in the future.

 

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Increasing Demand for Solar Energy

Global energy demand is increasing due to economic development and population growth. The EIA projects OECD electricity generation to increase 34% between 2014 and 2040, requiring an increase in capacity of more than 600 GW of electricity generation, including through solar energy projects. With exposure to volatile fossil fuel costs, increasing concern about carbon emissions and a variety of other factors, customers are seeking alternatives to traditional sources of electricity generation. We expect the coal and nuclear energy segments will continue to face regulatory and economic headwinds. As a form of electricity generation that is not dependent on fossil fuels, does not produce greenhouse gas emissions and whose costs are falling, solar energy is well positioned to continue to capture an increasing share of this new build capacity. We believe we are well-positioned to benefit from this increased demand for solar energy.

Government Incentives

Our Sponsors benefit from certain government incentives designed to promote the development and use of solar energy. These incentives include accelerated tax depreciation, ITCs and RPS programs and net metering policies. A loss or reduction in such incentives could decrease the attractiveness of solar energy projects to developers, including our Sponsors, which could reduce our acquisition opportunities. For example, the ITC, a federal income tax credit for 30% of eligible basis, is scheduled to fall to 10% of eligible basis for solar projects that commence commercial operations after December 31, 2016. For additional detail about these government incentives, please read “Industry—Solar Energy Markets—United States.”

 

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Results of Operations—Predecessor

 

     Year Ended
December 28,
2014
    Year Ended
December 29,
2013
 
     (In thousands)  

Operating revenues

   $ 9,231      $ 24,489   
  

 

 

   

 

 

 

Operating costs and expenses:

Cost of operations

  (3,195   13,111   

Cost of operations—parent

  937      928   

Selling, general and administrative

  4,818      4,272   

Depreciation

  2,339      3,224   
  

 

 

   

 

 

 

Total operating costs and expenses

  4,899      21,535   
  

 

 

   

 

 

 

Operating income

  4,332      2,954   

Other expense

Interest expense

  5,525      6,751   
  

 

 

   

 

 

 

Total other expense, net

  5,525      6,751   
  

 

 

   

 

 

 

Loss before income taxes

  (1,193   (3,797

Income tax expense

  (23   (30
  

 

 

   

 

 

 

Net loss

$ (1,216 $ (3,827
  

 

 

   

 

 

 

Fiscal Year

Our predecessor has a 52-to-53-week fiscal year that ends on the Sunday closest to December 31. Our predecessor’s 2014 fiscal year ended on December 28, 2014 and its 2013 fiscal year ended on December 29, 2013, each of which were 52-week fiscal years.

Year Ended December 28, 2014 Compared to Year Ended December 29, 2013

Revenues

 

(In thousands)    Year Ended
December 28,
2014
     Year Ended
December 29,
2013
     Change  

Operating revenues

   $ 9,231       $ 24,489       $ (15,258
  

 

 

    

 

 

    

 

 

 

Total revenues

$ 9,231    $ 24,489    $ (15,258
  

 

 

    

 

 

    

 

 

 

Total Revenues:    Operating revenues for the period were comprised of revenues generated from solar energy systems leased to residential customers. These systems are leased under lease agreements which are classified for accounting purposes either as sales-type leases or operating leases.

For those leases classified as sales-type leases, the net present value, or NPV, of the minimum lease payments, net of executory costs, is recognized as revenue when the leased asset is placed in service. Executory costs represent estimated lease operation and maintenance costs, including insurance, to be paid by the lessor, including any profit thereon. This NPV is inclusive of certain fixed and determinable state or local rebates, described below, defined in the lease document as part of minimum lease payments. The difference between the net amount and the gross amount of a sales-type lease is amortized as revenue over the lease term using the interest method. Revenue from executory costs is recognized on a straight-line basis over the lease terms, almost all of which are 20 years.

 

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For those leases classified as operating leases, revenue associated with renting the solar energy system and related executory costs are recognized on a straight-line basis over the lease terms, almost all of which are 20 years. Certain fixed and determinable state or local rebates, described below, defined in the lease document as part of minimum lease payments, are recorded as deferred revenue in the combined carve-out balance sheets when the lease is placed in service and amortized to revenue on a straight-line basis over the lease term.

State or local rebates that are fixed and determinable are recognized when the related solar energy system is placed in service. State or local rebates that are not fixed and determinable, since they relate to the generation of electricity from the leased solar energy system, are recognized as revenue upon cash receipt for both sales-type leases and operating leases.

Total revenue decreased 62% during the year ended December 28, 2014 as compared to the year ended December 29, 2013 due to a $15.3 million decrease in sales-type lease revenue, which is recognized when the sales-type leases are placed in service, as compared to operating lease revenue, which is recognized over the applicable lease term, as the majority of residential leases were placed in service in prior periods.

Concentrations:    All revenues for the period were generated in the United States in both the years ended December 28, 2014 and December 29, 2013.

Operating Costs and Expenses

 

(In thousands)   Year Ended
December 28,
2014
   

Year Ended

December 29,

       
    2013     Change  

Cost of operations

  $ (3,195   $ 13,111      $ (16,306

Cost of operations–parent

    937        928        9   

Selling, general and administrative

    4,818        4,272        546   

Depreciation

    2,339        3,224        (885
 

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

$ 4,899    $ 21,535    $ (16,636
 

 

 

   

 

 

   

 

 

 

Total operating costs and expenses as a percentage of revenues

  53.1   87.9

Cost of Operations:    Our predecessor’s cost of operations includes costs incurred in connection with sales-type leases that is recognized when the leased solar energy system is placed in service. Costs recognized on sales-type leases include initial direct costs to complete a leased solar energy system, such as costs for constructing a solar energy system inclusive of dealer payments, freight charges and direct lease costs. Our predecessor received federal cash grants under Section 1603 on a portion of our Residential Portfolio, the benefit of which was recorded as a reduction of cost of operations on the combined statements of operations when eligible leased solar energy systems are placed in service and all criteria necessary to be entitled to such grant income were met. For the years ended December 28, 2014 and December 29, 2013, we recognized $5.7 million and $4.7 million, respectively, of cash grants as a reduction of sales-type lease cost of operations.

The decrease of $16.3 million, or 124%, for the year ended December 28, 2014 as compared to the year ended December 29, 2013 is primarily a result of a $11.5 million decrease in sales-type leases as majority have been placed in service in prior periods and a $5.7 million decrease due to the deferral of the recognition of certain cash grants related to sales-type leases placed in service in prior periods until all criteria necessary to be entitled to such grant income were met during the year ended December 28, 2014, partially offset by a $0.8 million increase in other costs, including system output performance warranty and residential lease system repairs accrual.

 

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Cost of Operations—parent:    Cost of operations—parent represents executory costs that were allocated to the predecessor by our Sponsor. Costs incurred for these services were $0.9 million for each of the years ended December 28, 2014 and December 29, 2013.

Selling, General and Administrative:    Selling, general and administrative expense includes (i) charges that were incurred by SunPower that were specifically identified as attributable to our predecessor; and (ii) an allocation of SunPower operating expenses based on the proportional level of effort attributable to the operation of our predecessor’s portfolio of solar energy systems leased to residential homeowners and solar energy projects under construction. These expenses include legal, accounting, tax, treasury, information technology, insurance, employee benefit costs, human resources, procurement, and other corporate services and infrastructure costs.

The increase of $0.5 million, or 13%, for the year ended December 28, 2014 as compared to the year ended December 29, 2013 was primarily driven by the ramp up in non-capitalizable selling, general and administrative expenses for development and construction activities on projects included in our Initial Portfolio.

Depreciation:    Depreciation expense reflects costs associated with depreciation of our operating lease assets, which are depreciated using the straight-line method to their estimated residual value over the 20 year lease term. Our predecessor was entitled to receive federal cash grants for the construction of these leased solar energy systems; therefore, the benefit of the cash grants is recorded as a reduction to the carrying value of the operating lease assets when eligible leased solar energy systems are placed in service and all criteria necessary to be entitled to such grant income are met. After the cash grant contra-asset is recorded to reduce the carrying value of the operating lease assets, it is subsequently amortized as a reduction to depreciation expense. The decrease of $0.9 million, or 27.5%, for the year ended December 28, 2014 as compared to the year ended December 29, 2013 is primarily a result of the recognition of certain cash grants related to operating leases placed in service in prior periods, which were deferred until the recognition criteria was met during the year ended December 28, 2014.

Interest Expense

 

     Year Ended
December 28,
2014
   

Year Ended

December 29,

       
(In thousands)      2013     Change  

Interest expense

   $ 5,525      $ 6,751      $ (1,226

Interest expense as a percentage of revenues

     59.9     27.6  

Interest expense for the year ended December 28, 2014 included $4.8 million of non-cash interest expense and $0.7 million of cash interest expense and included $4.6 million of non-cash interest expense and $2.2 million of cash interest expense for the year ended December 29, 2013.

Non-cash interest expense for the years ended December 28, 2014 and December 29, 2013 totaled $4.8 million and $4.6 million, respectively, relating to two financing arrangements under which leased solar energy systems are financed by two third-party investors. Under the terms of these financing arrangements, the investors provided upfront payments to our predecessor, for which our predecessor recognizes as a financing obligation that is reduced over the specified term of the arrangement as customer receivables and federal cash grants are received by the third-party investors. Non-cash interest expense is recognized on our predecessor’s combined carve-out statements of operations using the effective interest rate method calculated at a rate of approximately 14%. Non-cash interest expense increased by $0.3 million, or 7%, for the year ended December 28, 2014 as compared to the year ended December 29, 2013 as portfolios were still being funded through the end of the year ended December 29, 2013, resulting in a higher interest expense on a higher financed balance throughout the year ended December 28, 2014.

 

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Cash interest expense for the year ended December 28, 2014 and December 29, 2013 totaled $0.7 million and $2.2 million, respectively, relating to letter of credit fees of $0.7 million and $0.3 million for the year ended December 28, 2014 and December 29, 2013, respectively, for the Quinto Project as well as an incremental $1.9 million financing fee for the year ended December 29, 2013 due to the third-party investors for undrawn commitment of the financing arrangement. The interest incurred related to the Quinto Project financing is not reflected as an expense in the combined carve-out statement of operations as it is capitalized to construction-in-process until the solar energy system is ready for its intended use.

Income Tax Expense

 

     Year Ended
December 28,

2014
    Year Ended
December 29,

2013
    Change  
(In thousands)       

Income tax expense

   $ 23      $ 30      $ (7

Income tax expense as a percentage of revenues

     0.2     0.1  

Our predecessor’s income tax expense for the years ended December 28, 2014 and December 29, 2013 was due to state income taxes payable. The change in effective tax rate for the year ended December 28, 2014 of 1.9% compared 0.8% for the year ended December 29, 2013 is the result of lower losses before income taxes for the year ended December 28, 2014 of $1.2 million compared to a loss before income taxes of $3.8 million for the year ended December 29, 2013 while our income tax expense year-on-year did not change materially.

Cash Flows

A summary of the sources and uses of cash and cash equivalents is as follows:

 

     Year Ended
December 28,

2014
    Year Ended
December 29,

2013
    Change  
(In thousands)       

Net cash provided by operating activities

   $ 10,476      $ 5,380      $ 5,096   

Net cash used in investing activities

   $ (63,906   $ (8,082   $ (55,824

Net cash provided by financing activities

   $ 53,430      $ 2,702      $ 50,728   

Operating Activities

Net cash provided by operating activities for the year ended December 28, 2014 was $10.5 million and was primarily the result of: (i) non-cash charges of $7.2 million for depreciation of operating lease assets and non-cash interest expense for two financing arrangements of leased solar energy systems; (ii) a $3.8 million decrease in cash grants and rebates receivable, (iii) a $0.5 million decrease in deferred costs related to leases placed in service during the year under sales-type leases, and (iv) a $5.2 million increase in accounts payable and other accrued liabilities, related to additional accruals of subcontractor costs related to our project assets. This was partially offset by: (i) a net loss of $1.2 million; (ii) an increase of $4.1 million in accounts receivable and financing receivable for rent due on sales-type and operating leases; and (iii) a $0.8 million increase in deferred revenue mainly due to additional rebates on systems under operating leases placed in service during the year.

Net cash provided by operating activities for the year ended December 29, 2013 was $5.4 million and was primarily the result of: (i) $7.8 million in non-cash charges for depreciation of operating lease assets and non-cash interest expense for upfront payments made by two third-party investors; (ii) an $11.4 million decrease in deferred costs related to leases placed in service during the year under sales-type leases; (iii) a $7.5 million increase in accounts payable and other accrued liabilities due to

 

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deferral of cash grant awards until all criteria necessary to be entitled to such grant income were met and an accrual of financing fees to the third-party investors for the two financing arrangements of leased solar energy systems; (iv) a $1.2 million increase in deferred revenue due to additional deferred rebates and rents on systems under operating leases placed in service during the year and (v) a $0.4 million increase in cash grants and rebates receivable. This was partially offset by: (i) a net loss of $3.8 million; and (ii) a $19.2 million increase in accounts receivable and financing receivable due to additional sales-type lease receivables recorded for systems placed in service during the year and billings on operating leases.

Investing Activities

Net cash used in investing activities for the years ended December 28, 2014 and December 29, 2013 was $63.9 million and $8.1 million, respectively, and relates to costs associated with solar energy projects under construction and completed residential leased solar energy systems that were classified as operating leases, net of cash grant received.

Financing Activities

Net cash provided by financing activities for the year ended December 28, 2014 was $53.4 million due to $61.5 million in debt proceeds from financing the Quinto Project and $3.1 million of capital contributions from SunPower, partially offset by $11.2 million of capital distributions to SunPower. Net cash provided by financing activities for the year ended December 29, 2013 was $2.7 million due to $54.6 million of payments from two third-party investors for two financing arrangements of leased solar energy systems, and $31.9 million of capital contributions from SunPower, partially offset by $83.8 million of capital distributions to SunPower.

Results of Operations—First Solar Project Entities

 

     Year Ended
December 31,
2014
    Year Ended
December 31,
2013
 
     (In thousands)  

Operating Revenue

   $ 4,042      $   
  

 

 

   

 

 

 

Operating costs and expenses:

Cost of operations

  947      122   

General and administrative

  4,710      1,591   

Depreciation and accretion

  1,206        
  

 

 

   

 

 

 

Total operating costs

  6,863      1,713   
  

 

 

   

 

 

 

Operating loss

  (2,821   (1,713

Income tax benefit

  5,340      696   
  

 

 

   

 

 

 

Equity in earnings of unconsolidated affiliate, net of tax

  (460     
  

 

 

   

 

 

 

Net income (loss)

$ 2,059    $ (1,017
  

 

 

   

 

 

 

 

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Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Revenues

 

(in thousands)    Year Ended
December 31,
2014
     Year Ended
December 31,
2013
     Change  

Revenues

   $ 4,042       $       $ 4,042   
  

 

 

    

 

 

    

 

 

 

Total revenues

$ 4,042    $     —    $ 4,042   
  

 

 

    

 

 

    

 

 

 

Revenue is generated from the sale of energy to various non-affiliated parties under long-term power purchase agreements. Amounts are recognized as energy and any related renewable energy attributes are delivered based on rates stipulated in the respective power purchase agreements. In June 2014, we placed the Maryland Solar Project into service which resulted in $4.0 million of revenue during the year ended December 31, 2014.

Operating Costs and Expenses

 

(in thousands)    Year Ended
December 31,
2014
    Year Ended
December 31,
2013
    Change  

Cost of operations

   $ 947      $ 122      $ 825   

General and administrative

     4,710        1,591        3,119   

Depreciation and accretion

     1,206               1,206   
  

 

 

   

 

 

   

 

 

 

Total operating costs

$ 6,863    $ 1,713    $ 5,150