VALLEY VIEW TRANSMISSION, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
| 1. | BACKGROUND AND BASIS OF PRESENTATION |
| | The Company, a limited liability company organized in Minnesota, is organized to own and operate a 10 megawatt wind powered electric generating facility. |
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| | The Company maintains cash balances at one financial institution located in Minnesota. Accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. |
RESTRICTED CASH AND ESCROW RESERVES
Restricted cash includes deposits held in bank accounts under the control by the lender or the power purchaser for which the use of funds, as required by financing agreements, is restricted to meet specific project obligations.
PROPERTY AND EQUIPMENT
| | Property and equipment are stated at cost and represent construction-in-progress expenditures for the wind energy facility under development. No depreciation has been provided since the facility has not yet been placed in service. |
LONG-LIVED ASSETS
Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including, but not limited to discounted cash flow models, quoted market values and third party independent appraisals.
DEFERRED FINANCING COSTS
Costs related to the Company’s debt financing discussed in Note 4 were capitalized as incurred. The Company will amortize these costs over the term of the related debt using the effective interest method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
| | The carrying amount of cash, property and equipment, and payables approximates their fair value. |
| | The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters, among others: useful lives of property and equipment and valuation of derivatives. Accordingly, actual may differ from previously estimated amounts, and such differences may be material to the financial statements. The Company periodically reviews estimates and assumptions, and the effects of any such revisions are reflected in the period in which the revision is made. |
REVENUE RECOGNITION
Revenue from the production and sale of electricity is recognized when produced and transferred to the customer.
VALLEY VIEW TRANSMISSION, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
INCOME TAXES
| | The Company is organized as a limited liability company under the state of Minnesota statutes. This type of organization is taxed as a partnership for federal and state income tax purposes. Under these provisions of partnership taxation, the LLC’s members are taxed individually on their share of the LLC’s net income or loss. The allocation of net income or loss and tax credits is based upon the allocation percentages in the Limited Liability Company Agreement. |
| 3. | CONCENTRATIONS, RISKS AND UNCERTANTIES |
The Company derived all of its revenue from sales to one customer for the nine months ended September 30, 2011.
Under a Financing Agreement, a Bank provided a construction loan facility for approximately $10,300,000 that converted to a term loan upon completion of construction, and an ITC Bridge Loan of $2,588,200. Substantially all assets and contract rights of the Company are pledged as security under a Financing Agreement, which was also guaranteed by the Company’s turbine supplier and minority membership unit holder of the Company.
Notes Payable-bank consists of the following:
| | | September 30, 2011 | |
| ITC Bridge Loan payable to a bank, interest at approximately at 5.0% (Prime Rate plus 1.75 basis points). The note was fully paid in March 2012 upon receipt of the U.S. Treasury 1603 cash grant | | $ | 2,588,200 | |
| Construction note payable to bank, interest at approximately at 5.0% (Prime Rate plus 1.75 basis points), with 75% of the loan balance subject to an interest rate swap arrangement. | | $ | 9,607,393 | |
| Total Bank Notes Payable | | $ | 12,195,593 | |
| 5. | DERIVATIVE FINANCIAL INSTRUMENT AND FAIR VALUE - INTEREST RATE SWAP |
In conjunction with the bank note financing arrangements in March 2011, the Company entered into an interest rate swap agreement with a notional amount of $7,700,000 to effectively convert those borrowings under its long-term debt arrangement from a variable interest rate to a fixed interest rate of approximately 3.71% during its 15-year term. The fair value of the interest rate swap agreement obligation (Level 2 in the fair value hierarchy) approximated $1,054,639 at September 30, 2011, and is recorded as a current and long-term liability in the balance sheet. The Company determines the fair value of the interest rate swap by using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the instrument. The analysis reflects the contractual terms of the swap agreement, including the period to maturity and uses observable market-based inputs and uses the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments.
VALLEY VIEW TRANSMISSION, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
The following table provides details regarding the Company's derivative instruments at September 30, 2011:
| Instruments | Balance Sheet location | | Assets | | | Liabilities | |
| Interest rate swap | Current liabilities | | $ | - | | | $ | 211,532 | |
| Interest rate swap | Long-term liabilities | | | - | | | | 843,107 | |
The following table provides details regarding the approximate gains and losses from the Company's derivative instruments in the statement of operations, none of which are designated as effective hedging instruments:
| Instrument | Statement of operations location | | Period ended September 30, 2011 |
| Interest rate swap | Other income (expense) | | ($1,054,639) |
On November 30, 2011, the wind energy facility achieved commercial operation. On or around that date, the Company acquired additional equity financing of approximately of approximately $4.4 million and the construction note payable was converted into a 15-year term note. In March 2012, the project received approximately $6.3 million in cash from the U.S. Treasury 1603 cash grant program to allow repayment of the ITC bridge loan, construction note payable and accounts payable.
