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EX-32 - EXHIBIT 32 - TerraForm Power, Inc.terraform-33117xexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - TerraForm Power, Inc.terraform-33117xexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - TerraForm Power, Inc.terraform-33117xexhibit311.htm
EX-2.1 - EXHIBIT 2.1 - TerraForm Power, Inc.terraform-33117xexhibit21.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________________________________________
FORM 10-Q
 _____________________________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-36542
 ______________________________________________________________
image0a13.jpg
TerraForm Power, Inc.
(Exact name of registrant as specified in its charter)
 _____________________________________________________________________________
Delaware
 
46-4780940
(State or other jurisdiction of incorporation or organization)
 
(I. R. S. Employer Identification No.)
7550 Wisconsin Avenue, 9th Floor, Bethesda, Maryland
 
20814
(Address of principal executive offices)
 
(Zip Code)
240-762-7700
(Registrant’s telephone number, including area code)
 _________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  o    No  x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  o    No  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
o
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
Emerging growth company
 
o
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o    No  x
As of July 31, 2017, there were 92,332,070 shares of Class A common stock outstanding and 48,202,310 shares of Class B common stock outstanding.
 




TerraForm Power, Inc. and Subsidiaries
Table of Contents
Form 10-Q

 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 





PART I - Financial Information

Item 1. Financial Statements.

TERRAFORM POWER, INC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)


 
Three Months Ended March 31,
 
2017
 
2016
Operating revenues, net
$
151,135

 
$
153,917

Operating costs and expenses:
 
 
 
Cost of operations
34,338

 
30,196

Cost of operations - affiliate
5,598

 
6,846

General and administrative expenses
36,725

 
17,183

General and administrative expenses - affiliate
1,419

 
5,437

Acquisition and related costs

 
2,743

Depreciation, accretion and amortization expense
60,987

 
59,007

Total operating costs and expenses
139,067

 
121,412

Operating income
12,068

 
32,505

Other expenses (income):
 
 
 
Interest expense, net
68,312

 
68,994

Loss (gain) on foreign currency exchange, net
587

 
(4,493
)
Loss on receivables - affiliate

 
845

Other expenses, net
360

 
567

Total other expenses, net
69,259

 
65,913

Loss before income tax (benefit) expense
(57,191
)
 
(33,408
)
Income tax (benefit) expense
(918
)
 
97

Net loss
(56,273
)
 
(33,505
)
Less: Net income attributable to redeemable non-controlling interests
835

 
2,545

Less: Net loss attributable to non-controlling interests
(25,339
)
 
(35,569
)
Net loss attributable to Class A common stockholders
$
(31,769
)
 
$
(481
)
 
 
 
 
Weighted average number of shares:
 
 
 
Class A common stock - Basic and diluted
92,072

 
87,833

Loss per share:
 
 
 
Class A common stock - Basic and diluted
$
(0.37
)
 
$
(0.01
)


See accompanying notes to unaudited condensed consolidated financial statements.

3



TERRAFORM POWER, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)



 
Three Months Ended March 31,
 
2017
 
2016
Net loss
$
(56,273
)
 
$
(33,505
)
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments:
 
 
 
Net unrealized gain arising during the period
2,680

 
6,573

Hedging activities:
 
 
 
Net unrealized gain (loss) arising during the period, net of tax
14,054

 
(32,965
)
Reclassification of net realized (gain) loss into earnings, net of tax
(386
)
 
369

Other comprehensive income (loss), net of tax
16,348

 
(26,023
)
Total comprehensive loss
(39,925
)
 
(59,528
)
Less comprehensive income (loss) attributable to non-controlling interests:
 
 
 
Net income attributable to redeemable non-controlling interests
835

 
2,545

Net loss attributable to non-controlling interests
(25,339
)
 
(35,569
)
Foreign currency translation adjustments
918

 
2,524

Hedging activities
5,972

 
(11,833
)
Comprehensive loss attributable to non-controlling interests
(17,614
)
 
(42,333
)
Comprehensive loss attributable to Class A common stockholders
$
(22,311
)
 
$
(17,195
)


See accompanying notes to unaudited condensed consolidated financial statements.

4



TERRAFORM POWER, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)


 
March 31, 2017
 
December 31, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
676,768

 
$
565,333

Restricted cash
115,258

 
114,950

Accounts receivable, net
101,740

 
89,461

Prepaid expenses and other current assets
61,045

 
61,749

Assets held for sale
42,040

 
61,523

Total current assets
996,851

 
893,016

 
 
 
 
Renewable energy facilities, net, including consolidated variable interest entities of $3,396,344 and $3,434,549 in 2017 and 2016, respectively
4,942,231

 
4,993,251

Intangible assets, net, including consolidated variable interest entities of $862,198 and $875,095 in 2017 and 2016, respectively
1,125,307

 
1,142,112

Deferred financing costs, net
6,716

 
7,798

Other assets
128,797

 
114,863

Restricted cash
2,879

 
2,554

Non-current assets held for sale
554,330

 
552,271

Total assets
$
7,757,111

 
$
7,705,865

 
 
 
 

See accompanying notes to unaudited condensed consolidated financial statements.

5



TERRAFORM POWER, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(CONTINUED)


 
March 31, 2017
 
December 31, 2016
Liabilities, Redeemable Non-controlling Interests and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt and financing lease obligations, including consolidated variable interest entities of $591,086 and $594,442 in 2017 and 2016, respectively
$
2,202,661

 
$
2,212,968

Accounts payable, accrued expenses and other current liabilities, including consolidated variable interest entities of $49,607 and $37,760 in 2017 and 2016, respectively
147,434

 
125,596

Deferred revenue
18,250

 
18,179

Due to SunEdison, net
16,851

 
16,692

Liabilities related to assets held for sale
23,850

 
21,798

Total current liabilities
2,409,046

 
2,395,233

Long-term debt and financing lease obligations, less current portion, including consolidated variable interest entities of $371,762 and $375,726 in 2017 and 2016, respectively
1,813,749

 
1,737,946

Deferred revenue, less current portion
51,921

 
55,793

Deferred income taxes
28,362

 
27,723

Asset retirement obligations, including consolidated variable interest entities of $93,113 and $92,213 in 2017 and 2016, respectively
146,241

 
148,575

Other long-term liabilities
31,711

 
31,470

Non-current liabilities related to assets held for sale
413,001

 
410,759

Total liabilities
4,894,031

 
4,807,499

 
 
 
 
Redeemable non-controlling interests
180,271

 
180,367

Stockholders' equity:
 
 
 
Preferred stock, $0.01 par value per share, 50,000,000 shares authorized, no shares issued

 

Class A common stock, $0.01 par value per share, 850,000,000 shares authorized, 92,512,576 and 92,476,776 shares issued in 2017 and 2016, respectively, and 92,247,740 and 92,223,089 shares outstanding in 2017 and 2016, respectively
925

 
920

Class B common stock, $0.01 par value per share, 140,000,000 shares authorized, 48,202,310 shares issued and outstanding in 2017 and 2016
482

 
482

Class B1 common stock, $0.01 par value per share, 260,000,000 shares authorized, no shares issued

 

Additional paid-in capital
1,476,492

 
1,467,108

Accumulated deficit
(266,209
)
 
(234,440
)
Accumulated other comprehensive income
32,370

 
22,912

Treasury stock, 264,836 and 253,687 shares in 2017 and 2016, respectively
(4,260
)
 
(4,025
)
Total TerraForm Power, Inc. stockholders' equity
1,239,800

 
1,252,957

Non-controlling interests
1,443,009

 
1,465,042

Total stockholders' equity
2,682,809

 
2,717,999

Total liabilities, redeemable non-controlling interests and stockholders' equity
$
7,757,111

 
$
7,705,865



See accompanying notes to unaudited condensed consolidated financial statements.

6



TERRAFORM POWER, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-controlling Interests
 
 
 
Class A Common Stock Issued
 
Class B Common Stock Issued
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
Common Stock Held in Treasury
 
 
 
 
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
 
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Total
 
Capital
 
 
 
Total
 
Balance as of December 31, 2016
92,477

 
$
920

 
48,202

 
$
482

 
$
1,467,108

 
$
(234,440
)
 
$
22,912

 
(254
)
 
$
(4,025
)
 
$
1,252,957

 
$
1,792,295

 
$
(312,847
)
 
$
(14,406
)
 
$
1,465,042

 
$
2,717,999

Stock-based compensation
36

 
5

 

 

 
1,702

 

 

 
(11
)
 
(235
)
 
1,472

 

 

 

 

 
1,472

Net loss1

 

 

 

 

 
(31,769
)
 

 

 

 
(31,769
)
 

 
(25,339
)
 

 
(25,339
)
 
(57,108
)
Net SunEdison investment

 

 

 

 
3,893

 

 

 

 

 
3,893

 
2,031

 

 

 
2,031

 
5,924

Other comprehensive income

 

 

 

 

 

 
9,458

 

 

 
9,458

 

 

 
6,890

 
6,890

 
16,348

Sale of membership interests and contributions from non-controlling interests in renewable energy facilities

 

 

 

 

 

 

 

 

 

 
6,935

 

 

 
6,935

 
6,935

Distributions to non-controlling interests in renewable energy facilities

 

 

 

 

 

 

 

 

 

 
(6,535
)
 

 

 
(6,535
)
 
(6,535
)
Accretion of redeemable non-controlling interest

 

 

 

 
(2,226
)
 

 

 

 

 
(2,226
)
 

 

 

 

 
(2,226
)
Equity reallocation

 

 

 

 
6,015

 

 

 

 

 
6,015

 
(6,015
)
 

 

 
(6,015
)
 

Balance as of March 31, 2017
92,513

 
$
925

 
48,202

 
$
482

 
$
1,476,492

 
$
(266,209
)
 
$
32,370

 
(265
)
 
$
(4,260
)
 
$
1,239,800

 
$
1,788,711

 
$
(338,186
)
 
$
(7,516
)
 
$
1,443,009

 
$
2,682,809

———
(1)
Excludes $835 of net income attributable to redeemable non-controlling interests.

See accompanying notes to unaudited condensed consolidated financial statements.

7



TERRAFORM POWER, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


 
Three Months Ended March 31,
2017
 
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(56,273
)
 
$
(33,505
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation, accretion and amortization expense
60,987

 
59,007

Amortization of favorable and unfavorable rate revenue contracts, net
9,827

 
10,503

Amortization of deferred financing costs and debt discounts
4,639

 
8,754

Recognition of deferred revenue
(3,987
)
 
(2,322
)
Unrealized gain on commodity contract derivatives, net
(2,231
)
 
(352
)
Stock-based compensation expense
2,509

 
1,023

Unrealized loss (gain) on foreign currency exchange, net
748

 
(3,166
)
Loss on receivables - affiliate

 
845

Deferred taxes
639

 
62

Other, net
(22
)
 
552

Changes in assets and liabilities:
 
 
 
Accounts receivable
(10,982
)
 
(14,495
)
Prepaid expenses and other current assets
7,024

 
(2,552
)
Accounts payable, accrued expenses and other current liabilities
19,858

 
7,366

Deferred revenue
186

 
(636
)
Other, net
2,306

 
4,190

Net cash provided by operating activities
35,228

 
35,274

Cash flows from investing activities:
 
 
 
Capital expenditures
(2,076
)
 
(31,711
)
Acquisitions of renewable energy facilities from third parties, net of cash acquired

 
(4,064
)
Change in restricted cash
32,730

 
5,638

Net cash provided by (used in) investing activities
30,654

 
(30,137
)
Cash flows from financing activities:
 
 
 
Borrowings of non-recourse long-term debt
79,835

 

Principal payments on non-recourse long-term debt
(11,870
)
 
(29,712
)
Revolver repayment
(5,000
)
 

Due to SunEdison, net
(4,841
)
 
(11,614
)
Sale of membership interests and contributions from non-controlling interests in renewable energy facilities
6,935

 
15,612

Distributions to non-controlling interests in renewable energy facilities
(9,692
)
 
(6,172
)
Net SunEdison investment
7,371

 
29,747

Debt financing fees
(2,791
)
 
(4,500
)
Net cash provided by (used in) financing activities
59,947

 
(6,639
)
Net increase (decrease) in cash and cash equivalents
125,829

 
(1,502
)
Reclassification of cash and cash equivalents to assets held for sale
(14,104
)
 
(21,697
)
Effect of exchange rate changes on cash and cash equivalents
(290
)
 
65

Cash and cash equivalents at beginning of period
565,333

 
626,595

Cash and cash equivalents at end of period
$
676,768

 
$
603,461

 
 
 
 
Supplemental Disclosures:
 
 
 
Cash paid for interest
$
61,318

 
$
61,099

Cash paid for income taxes

 


See accompanying notes to unaudited condensed consolidated financial statements.

8



TERRAFORM POWER, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data, unless otherwise noted)


1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

TerraForm Power, Inc. ("TerraForm Power") and its subsidiaries (together with TerraForm Power, the "Company") is a controlled affiliate of SunEdison, Inc. (together with its consolidated subsidiaries excluding the Company and TerraForm Global, Inc. and its subsidiaries, "SunEdison"). TerraForm Power is a holding company and its sole asset is an equity interest in TerraForm Power, LLC ("Terra LLC"), which through its subsidiaries owns and operates renewable energy facilities that have long-term contractual arrangements to sell the electricity generated by these facilities to third parties. The related green energy certificates, ancillary services and other environmental attributes generated by these facilities are also sold to third parties. TerraForm Power is the managing member of Terra LLC and operates, controls and consolidates the business affairs of Terra LLC.

The SunEdison Bankruptcy and the Brookfield Sponsorship Transaction

On April 21, 2016, SunEdison Inc. and certain of its domestic and international subsidiaries (the "SunEdison Debtors") voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code (the "SunEdison Bankruptcy"). The Company is not a part of the SunEdison Bankruptcy and has no plans to file for bankruptcy itself. The Company does not rely on SunEdison for funding or liquidity and believes that the Company will have sufficient liquidity to support its ongoing operations, absent the potential negative impact of default conditions that could arise from failure to meet financial statement deadlines as described below. The Company believes its equity interests in its renewable energy facilities that are legally owned by the Company’s subsidiaries are not available to satisfy the claims of the creditors of the SunEdison Bankruptcy.

In anticipation of and in response to SunEdison’s financial and operating difficulties, which culminated in the SunEdison Bankruptcy, at the direction of its Board of Directors (the "Board"), the Company has undertaken, and continues to undertake, a number of strategic initiatives to mitigate the adverse impacts of the SunEdison Bankruptcy on the Company. These initiatives focused on governance, operations and business performance initiatives deemed especially critical because SunEdison provided all personnel and services to the Company (other than those operational services provided by third parties). These initiatives include, among other things, developing continuity plans, establishing stand-alone information technology, accounting and other systems and infrastructure, directly hiring employees and retaining backup or replacement operation and maintenance ("O&M") and asset management services for the Company's wind and solar facilities from other providers.

As part of this overall strategic review process, the Company also initiated a process for the exploration and evaluation of potential strategic alternatives for the Company, including potential transactions to secure a new sponsor or sell the Company. This process resulted in the Company's entry into a definitive merger and sponsorship transaction agreement (the “Merger Agreement”) on March 6, 2017 with Orion US Holdings 1 L.P. ("Orion Holdings") and BRE TERP Holdings Inc., a wholly-owned subsidiary of Orion Holdings ("Merger Sub"), which are affiliates of Brookfield Asset Management, Inc. (“Brookfield”). Subject to the satisfaction of conditions precedent described below, Orion Holdings would hold approximately 51% of the Class A shares of TerraForm Power following the consummation of the merger of Merger Sub with and into the Company (the "Merger"). In addition, the Merger Agreement provides that at or prior to the closing of the Merger, the Company will enter into a series of sponsorship documents with Brookfield and certain of its affiliates as are more fully described in Note 15. Related Parties and Note 6. Long-term Debt.

Concurrently with the Company's entry into the Merger Agreement, the Company and SunEdison also entered into a settlement agreement (the “Settlement Agreement”). Under the Settlement Agreement, in connection with the closing of the Merger, SunEdison will exchange its Class B units of Terra LLC for 48,202,310 Class A shares of TerraForm Power, plus an incremental amount of Class A shares such that immediately prior to the consummation of the Merger, SunEdison will hold an aggregate number of Class A shares equal to 36.9% of the Company’s fully diluted share count. As a result of and following completion of the exchange, all of the issued and outstanding shares of Class B common stock of the Company will be redeemed and retired. In addition, also as part of the settlement, SunEdison agreed to deliver the outstanding incentive distribution rights of Terra LLC (the “IDRs”) held by SunEdison or certain of its affiliates to TerraForm Power or its designee and in connection therewith, concurrently with the execution and delivery of the Merger Agreement, TerraForm Power, Terra LLC, BRE Delaware, Inc. (the “Brookfield IDR Holder”) and SunEdison and certain of its affiliates have entered into an Incentive Distribution Rights Transfer Agreement (the “IDR Transfer Agreement”), pursuant to which certain SunEdison


9




affiliates will transfer all of the IDRs to Brookfield IDR Holder at the effective time of the Merger. SunEdison also executed and delivered a voting and support agreement (the "Voting and Support Agreement"), pursuant to which it has agreed to vote or cause to be voted any shares of common stock of TerraForm Power held by it or any of its controlled affiliates in favor of the Merger and to take certain other actions to support the consummation of the transaction. Upon the consummation of the Merger or other transaction jointly supported by the Company and SunEdison, all agreements between the Company and the SunEdison Debtors will be rejected, subject to certain limited exceptions, and the Company will be deemed to have no damages, claims or liabilities arising from those rejections.

The closing of the Merger is subject to conditions, including a non-waivable condition to closing that the Merger Agreement and the transactions contemplated thereby be approved by holders of a majority of the outstanding Class A shares, excluding SunEdison, Orion Holdings, any of their respective affiliates or any person with whom any of them has formed (and not terminated) a “group” (as such term is defined in the Securities Exchange Act of 1934, as amended). Additional conditions include the adoption of the Merger Agreement by the holders of a majority of the total voting power of the outstanding shares of the Company’s common stock entitled to vote on the Merger and other customary closing conditions. Certain conditions have been satisfied including (1) the entry by the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) of orders authorizing and approving the entry by SunEdison (and, if applicable, SunEdison’s debtor affiliates) into the Settlement Agreement, the Voting and Support Agreement and any other agreement entered into in connection with the Merger or the other transactions contemplated thereby to which SunEdison or any other debtor will be a party, (2) the expiration or early termination of the waiting period applicable to consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (3) the closing of the sale of substantially all of the Company's U.K. solar facilities as described in Note 2. Assets Held for Sale. There is no financing condition to the consummation of the transactions contemplated by the Merger Agreement.

The Merger Agreement contains specified termination rights, including the right for each of the Company or Orion Holdings to terminate the Merger Agreement if the Merger is not consummated by December 6, 2017, subject to extension until March 6, 2018 to obtain required regulatory approvals. The Merger Agreement also provides for other customary termination rights for both the Company and Orion Holdings, as well as a mutual termination right in the event that the Settlement Agreement is terminated in accordance with its terms. In the event the Merger Agreement is terminated by either the Company or Orion Holdings due to the failure to obtain the requisite stockholder approvals or the termination of the Settlement Agreement, and the Board did not change its recommendation to the Company's stockholders to approve the Merger, the Company will pay to Orion Holdings all reasonable and documented out-of-pocket expenses incurred in connection with the Merger Agreement, in an amount not to exceed $17.0 million. The Merger Agreement further provides that upon termination of the Merger Agreement under certain other specified circumstances, the Company will be required to pay Orion Holdings a termination fee of $50.0 million. The Company's obligation to pay any combination of out-of-pocket expenses or termination fees shall not in any event exceed $50.0 million.

The Settlement Agreement has been approved by the Bankruptcy Court. However, the settlements, mutual release and certain other terms and conditions of the Settlement Agreement will only become effective upon the consummation of the Merger or other transaction jointly supported by the Company and SunEdison or upon a “Stand-Alone Conversion.” SunEdison may elect to effect a Stand-Alone Conversion if the Merger is not consummated due to the failure to receive the requisite stockholder vote and SunEdison is otherwise in compliance with the Settlement Agreement and the Voting and Support Agreement. Upon a Stand-Alone Conversion, SunEdison would exchange its Class B units in Terra LLC and its Class B shares in TerraForm Power for newly issued Class A common stock constituting 36.9% of the aggregate issued and outstanding Class A common stock on a fully diluted basis. SunEdison would also be required to deliver a customary voting agreement and an irrevocable proxy in customary form and substance reasonably acceptable to the Company and the holder of the Class A common stock issued to SunEdison, which may be SunEdison or a third party that receives the Class A common stock as part of a distribution in connection with SunEdison’s plan of reorganization. This voting agreement would require the applicable stockholder, for a period of one year from the date of the Stand-Alone Conversion, to vote one-half of its voting power in the same proportion of the votes cast by stockholders not a party to a similar voting agreement, which would effectively reduce the voting power of the applicable stockholder.

As part of these strategic initiatives, the Company has also been working to obtain waivers or forbearance of defaults that have arisen as a result of the SunEdison Bankruptcy and the delays in the completion of the Company’s corporate and project-level audits. In most of the Company's debt-financed projects, SunEdison Debtors are a party to a material project agreement or guarantor thereof, such as being a party to or guarantor of an asset management or O&M contract. As a result of the SunEdison Bankruptcy and delays in delivery of 2015 audited financial statements for the Company and/or certain project-


10




level subsidiaries, among other things, the Company experienced defaults under most of its non-recourse financing agreements in 2016. During the course of 2016 and to date in 2017, the Company cured or obtained waivers or temporary forbearances with respect to most of these defaults and has transitioned, or is working to transition, the project-level services provided by SunEdison Debtors to third parties or in-house to a Company affiliate; however, certain of these defaults persist. Moreover, the Company has experienced additional defaults under most of the same non-recourse financing agreements in 2017 as the result of the failure to timely complete Company and/or project-level audits. The Company filed its Form 10-K for the year ended December 31, 2016 on July 21, 2017 and is working to complete the remaining project-level audits and seeking to obtain waivers of such default. To date none of the non-recourse financings has been accelerated and no project-level lender has notified the Company of such lenders election to enforce project security interests, although no assurances can be given that the Company will obtain waivers and/or permanent forbearance of existing or future defaults or that none of the financings will be accelerated. The Company's corporate-level revolving credit facility and senior note indentures do not include an event of default provision directly triggered by the occurrence of the SunEdison Bankruptcy.

Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

As described above, SunEdison filed for bankruptcy on April 21, 2016. The Company is not a part of the SunEdison Bankruptcy and has no plans to file for bankruptcy itself. The Company does not rely on SunEdison for funding or liquidity and believes that it will have sufficient liquidity to support its ongoing operations, absent the potential negative impact of default conditions that could arise from failure to meet financial statement deadlines as described below. The Company believes its equity interests in its renewable energy facilities that are legally owned by the Company's subsidiaries are not available to satisfy the claims of the creditors of the SunEdison Bankruptcy. However, we believe the SunEdison Bankruptcy and the related impacts raise substantial doubt about our ability to continue as a going concern for the following reasons:

Prior to the SunEdison Bankruptcy, we relied almost exclusively on the personnel and management and administration services provided by or under the direction of SunEdison. Subsequent to the SunEdison Bankruptcy, we have incurred and expect to continue to incur significant costs procuring these services from unaffiliated third parties. In addition, if we are unable to replace these services or key personnel in the future, this would restrict our ability to timely complete Company or project-level audits as required by our corporate and non-recourse financing arrangements.
We experienced covenant defaults under most of our financing arrangements in 2016, mainly because of delays in the delivery of project-level audited financial statements and the delay in the filing of the Company’s audited annual financial statements for 2015 on Form 10-K, which was filed in December of 2016. In addition, in a number of cases the SunEdison Bankruptcy resulted in defaults because SunEdison Debtors have been serving as O&M and asset management services providers or as guarantors under relevant contracts. We have been working diligently with our lenders to cure or waive instances of default, including through the completion of project-level audits and the retention of replacement service providers. However, there can be no assurance that all remaining defaults will be cured or waived, and we have experienced additional defaults under most of the same non-recourse financing agreements in 2017 as the result of the failure to timely complete Company and/or project-level audits. The Company filed its Form 10-K for the year ended December 31, 2016 on July 21, 2017 and is working to complete the remaining project-level audits and seeking to obtain waivers of such default. If the remaining or future defaults are not cured or waived, this would restrict the ability of the relevant project-level subsidiaries to make distributions to us, which may affect our ability to meet certain covenants related to our revolving credit facility at the corporate level, or entitle the related lenders to demand repayment or enforce their security interests, which could have a material adverse effect on our business, results of operations, financial condition and ability to pay dividends. If this were to occur, the Company would not have sufficient liquidity to meet its obligations.
Finally, there is a risk that an interested party in the SunEdison Bankruptcy could request that the assets and liabilities of the Company be substantively consolidated with SunEdison. Bankruptcy courts have broad equitable powers, and thus, outcomes in bankruptcy proceedings are inherently difficult to predict. To the extent the Bankruptcy Court were to determine that substantive consolidation was appropriate under the Company's facts and circumstances, the assets and liabilities of the Company could be made available to help satisfy the debt or contractual obligations of SunEdison. While it has not been requested to date and we believe there is no basis for substantive consolidation in our


11




circumstances, we cannot assure you that substantive consolidation will not be requested in the future or that the Bankruptcy Court would not consider it.

As described above under "The SunEdison Bankruptcy and the Brookfield Sponsorship Transaction," the Company has undertaken, and continues to undertake, a number of strategic initiatives to mitigate the adverse impacts of the SunEdison Bankruptcy on the Company. While the Company believes that the actions described above are more likely than not to address the substantial doubt surrounding our ability to continue as a going concern, we cannot assert that it is probable that management's plans will fully mitigate the conditions identified. If we cannot continue as a going concern, material adjustments to the carrying values and classifications of our assets and liabilities and the reported amounts of income and expense could be required.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Securities and Exchange Commission’s ("SEC") regulations for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. The financial statements should be read in conjunction with the accounting policies and other disclosures as set forth in the notes to the Company’s annual financial statements for the year ended December 31, 2016, filed with the SEC on Form 10-K on July 21, 2017. Interim results are not necessarily indicative of results for a full year.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments consisting of normal and recurring accruals necessary to present fairly the Company's financial position as of March 31, 2017 and the results of operations, comprehensive loss and cash flows for the three months ended March 31, 2017 and 2016.

Use of Estimates

In preparing the unaudited condensed consolidated financial statements, the Company used estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements. Such estimates also affect the reported amounts of revenues, expenses and cash flows during the reporting period. To the extent there are material differences between the estimates and actual results, the Company's future results of operations would be affected.

Recent Accounting Developments

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies how to apply the implementation guidance on principal versus agent considerations related to the sale of goods or services to a customer as updated by ASU No. 2014-09. ASU No. 2014-09 and ASU No. 2016-08 will become effective for the Company on January 1, 2018. Early application is permitted but not before January 1, 2017. ASU No. 2014-09 and ASU No. 2016-08 permit the use of either the retrospective or modified retrospective method. The Company is working through an adoption plan which includes the evaluation of revenue contracts compared to the new standards and evaluating the impact of the new standards on the Company's consolidated financial statements and related disclosures. The Company does not plan to adopt these standards prior to January 1, 2018.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which primarily changes the lessee's accounting for operating leases by requiring recognition of lease right-of-use assets and lease liabilities. This standard is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect of ASU No. 2016-02 on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718). This update was issued as part of the FASB's simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the


12




classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. This update is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted if all provisions are adopted within the same period. The Company adopted ASU No. 2016-09 as of January 1, 2017, which did not result in any material adjustments to the Company's consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815), which clarifies that determining whether the economic characteristics of a put or call are clearly and closely related to its debt host requires only an assessment of the four-step decision sequence outlined in FASB ASC paragraph 815-15-25-24. Additionally, entities are not required to separately assess whether the contingency itself is clearly and closely related. This standard is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. The amendments in this update should be applied on a modified retrospective basis. The adoption of ASU No. 2016-06 as of January 1, 2017 did not have an impact on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323). The amendments of ASU No. 2016-07 eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting with no retroactive adjustment to the investment. In addition, ASU No. 2016-07 requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The guidance in ASU No. 2016-07 is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASU No. 2016-07 is required to be applied prospectively and early adoption is permitted. The Company evaluated this standard and determined that it did not have an impact on its consolidated financial statements as it does not have any equity method investments.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The amendments of ASU No. 2016-15 were issued to address eight specific cash flow issues for which stakeholders have indicated to the FASB that a diversity in practice existed in how entities were presenting and classifying these items in the statement of cash flows. The issues addressed by ASU No. 2016-15 include but are not limited to the classification of debt prepayment and debt extinguishment costs, payments made for contingent consideration for a business combination, proceeds from the settlement of insurance proceeds, distributions received from equity method investees and separately identifiable cash flows and the application of the predominance principle. The amendments of ASU No. 2016-15 are effective for public entities for fiscal years beginning after December 15, 2017 and interim periods in those fiscal years. Early adoption is permitted, including adoption in an interim fiscal period with all amendments adopted in the same period. The adoption of ASU No. 2016-15 is required to be applied retrospectively. The Company is currently evaluating the impact of the standard on its consolidated statements of cash flows.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. The amendments of ASU No. 2016-16 were issued to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party which has resulted in diversity in practice and increased complexity within financial reporting. The amendments of ASU No. 2016-16 would require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and do not require new disclosure requirements. The amendments of ASU No. 2016-16 are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted and the adoption of ASU No. 2016-16 should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company does not expect this standard to have an impact on its consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-17, Consolidation (Topic 810), Interests Held through Related Parties That Are under Common Control. ASU No. 2016-17 updates ASU No. 2015-02. Under the amendments, a single decision maker is not required to consider indirect interests held through related parties that are under common control with the


13




single decision maker to be the equivalent of direct interests in their entirety. Instead, a single decision maker is required to include those interests on a proportionate basis consistent with indirect interests held through other related parties. ASU No. 2016-17 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The adoption of ASU No. 2016-17 as of January 1, 2017 did not have an impact on the Company's consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 320), Restricted Cash, a Consensus of the FASB Emerging Issues Task Force. The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update do not provide a definition of restricted cash or restricted cash equivalents. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently evaluating the effect of this standard on its consolidated financial statements.

In December 2016, the FASB issued ASU No. 2016-19, Technical Corrections and Improvements. The amendments cover a wide range of topics in the Accounting Standards Codification, covering differences between original guidance and the Accounting Standards Codification, guidance clarification and reference corrections, simplification and minor improvements. The adoption of ASU No. 2016-19 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. The Company evaluated this standard and determined that it did not have an impact on its consolidated financial statements.

In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in this update are of a similar nature to the items typically addressed in ASU 2016-19, Technical Corrections and Improvements. However, the FASB decided to issue a separate update for technical corrections and improvements to Topic 606 and other Topics amended by ASU No. 2014-09 to increase stakeholders’ awareness of the proposals and to expedite improvements to ASU No. 2014-09. The adoption of ASU No. 2016-20 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual periods. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the effect of this standard on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business. The amendment seeks to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The adoption of ASU No. 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments should be applied prospectively on or after the effective dates. Accordingly, the adoption will not have an effect on the Company's historical financial statements. The Company is currently evaluating the effect of this standard on future consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. The amendment simplifies the accounting for goodwill impairment by removing Step 2 of the current test, which requires calculation of a hypothetical purchase price allocation. Under the revised guidance, goodwill impairment will be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill (currently Step 1 of the two step impairment test). Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The standard is effective January 1, 2020, with early adoption permitted, and must be adopted on a prospective basis. This updated guidance is not currently expected to impact the Company's financial reporting as the Company does not have any goodwill.

In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This ASU is meant to clarify the scope of ASC Subtopic 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets and to add guidance for partial sales of nonfinancial assets. ASU No. 2017-05 is to be applied using a full retrospective method or a modified retrospective method as outlined in the guidance and is effective at the same time as ASU No. 2014-09. Further, the Company is required to adopt ASU No. 2017-05 at the same time that it adopts the


14




guidance in ASU No. 2014-09. The Company is currently evaluating the effect of this standard on its consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. The amendment clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance is expected to reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as a modification. Changes to the terms or conditions of a share-based payment award that do not impact the fair value of the award, vesting conditions and the classification as an equity or liability instrument will not need to be assessed under modification accounting. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. Accordingly, the adoption will not have an effect on the Company's historical financial statements. The Company is currently evaluating the effect of this standard on future consolidated financial statements.

2. ASSETS HELD FOR SALE

U.K. Portfolio Sale    

The Company commenced a sale of substantially all of its portfolio of solar power plants located in the United Kingdom (the "U.K.") through a broad based sales process pursuant to a plan approved by management during 2016 (24 operating projects for sale representing 365.0 MW, the "U.K. Portfolio"), and it was determined that this portfolio met the criteria to be classified as held for sale during the first quarter of 2016. As a result, the Company classified the assets and liabilities of this portfolio as held for sale as of March 31, 2017 and December 31, 2016 (refer to the table below) and measured each at the lower of carrying value or fair value less cost to sell. The Company's analysis indicated that the fair value less costs to sell exceeded the carrying value of the assets for each period the portfolio was classified as held for sale and no impairment losses were recognized during the three months ended March 31, 2017 or for any period in 2016.

On May 11, 2017, the Company announced that TerraForm Power Operating, LLC ("Terra Operating LLC") completed its previously announced sale of the U.K. Portfolio to Vortex Solar UK Limited, a renewable energy platform managed by the private equity arm of EFG Hermes, an investment bank. Terra Operating LLC received approximately $211 million of proceeds from the sale, net of transaction expenses and distributions taken from the U.K. Portfolio after announcement and before closing of the sale, which was used for the reduction of the Company's indebtedness as discussed in Note 6. Long-term Debt. The sale also resulted in a reduction in the Company's non-recourse project debt by approximately GBP 301 million at the U.K. Portfolio level. The Company has retained 11.1 MW of solar assets in the U.K.

Residential Portfolio Sale

The Company also began exploring a sale of substantially all of its portfolio of residential rooftop solar assets located in the United States (11.4 MW of assets as described below) through a strategic sales process in 2016, and it was determined that these assets met the criteria to be classified as held for sale during the fourth quarter of 2016. As a result, the Company classified the related assets and liabilities as held for sale as of December 31, 2016 (refer to the table below) and measured each at the lower of carrying value or fair value less costs to sell. The Company's analysis indicated that the carrying value of the assets exceeded the fair value less costs to sell, and thus an impairment charge of $15.7 million was recognized in the fourth quarter of 2016. The Company also recorded a $3.3 million charge in the third quarter of 2016 due to the decision to abandon certain residential construction in progress assets that were not completed by SunEdison as a result of the SunEdison Bankruptcy.

On March 14, 2017, Enfinity SPV Holdings 2, LLC, a subsidiary of the Company, entered into a membership interest purchase and sale agreement with Greenbacker Residential Solar II, LLC for the sale of 100% of the membership interests of Enfinity Colorado DHA 1, LLC, a Colorado limited liability company that owns and operates 2.5 MW of solar installations situated on the roof of public housing units located in Colorado and owned by the Denver Housing Authority. The transaction closed on March 31, 2017, and the Company received net proceeds of $1.1 million in the beginning of the second quarter of 2017. There was no additional loss recognized during the first quarter of 2017 as a result of this sale.

In addition, the Company entered into a membership interest purchase and sale agreement with Greenbacker Residential Solar II, LLC on June 12, 2017 for the sale of 100% of the membership interests of TerraForm Resi Solar Manager,


15




LLC, a subsidiary of the Company, which owns and operates 8.9 MW of rooftop solar installations. The transaction closed on June 30, 2017, and the Company received total net proceeds of $6.0 million in the third quarter of 2017. The related assets and liabilities of these residential rooftop solar installations that were not sold until the second quarter of 2017 were also classified as held for sale as of March 31, 2017 (refer to the table below).

The following table summarizes the major classes of assets and liabilities which are classified as held for sale on the Company's unaudited condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016:
 
 
As of March 31, 2017
 
As of December 31, 2016
(In thousands)
 
U.K. Portfolio
 
Residential Portfolio
 
Total
 
U.K. Portfolio
 
Residential Portfolio
 
Total
Assets held for sale:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
14,104

 
$

 
$
14,104

 
$

 
$

 
$

Restricted cash
 
21,000

 
262

 
21,262

 
53,604

 
1,202

 
54,806

Accounts receivable, net
 
5,438

 
260

 
5,698

 
4,952

 
300

 
5,252

Prepaid expenses and other current assets
 
976

 

 
976

 
1,295

 
170

 
1,465

Total current assets held for sale
 
41,518

 
522

 
42,040

 
59,851


1,672


61,523

 
 
 
 
 
 
 
 
 
 
 
 
 
Renewable energy facilities, net
 
535,508

 
14,171

 
549,679

 
529,154

 
19,534

 
548,688

Intangible assets, net
 
1,498

 

 
1,498

 
1,480

 

 
1,480

Other assets
 
3,153

 

 
3,153

 
2,103

 

 
2,103

Total non-current assets held for sale
 
540,159

 
14,171

 
554,330

 
532,737


19,534


552,271

 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets held for sale
 
$
581,677

 
$
14,693

 
$
596,370

 
$
592,588

 
$
21,206

 
$
613,794

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities related to assets held for sale:
 
 
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
 
$
14,684

 
$

 
$
14,684

 
$
14,510

 
$
175

 
$
14,685

Accounts payable, accrued expenses and other current liabilities
 
9,075

 
81

 
9,156

 
5,980

 
245

 
6,225

Deferred revenue
 

 
10

 
10

 

 
10

 
10

Due to SunEdison, net
 

 

 

 
692

 
186

 
878

Total current liabilities related to assets held for sale
 
23,759

 
91

 
23,850

 
21,182


616


21,798

 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, less current portion
 
353,928

 

 
353,928

 
349,687

 
4,190

 
353,877

Deferred revenue, less current portion
 

 
246

 
246

 

 
246

 
246

Asset retirement obligations
 
40,552

 

 
40,552

 
39,563

 
287

 
39,850

Other long-term liabilities
 
18,275

 

 
18,275

 
16,786

 

 
16,786

Total non-current liabilities related to assets held for sale
 
412,755

 
246

 
413,001

 
406,036


4,723


410,759

 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities related to assets held for sale
 
$
436,514

 
$
337

 
$
436,851

 
$
427,218

 
$
5,339

 
$
432,557




16




3. RENEWABLE ENERGY FACILITIES

Renewable energy facilities, net consists of the following: 
(In thousands)
 
March 31, 2017
 
December 31, 2016
Renewable energy facilities in service, at cost
 
$
5,355,826

 
$
5,354,883

Less accumulated depreciation - renewable energy facilities
 
(416,512
)
 
(364,756
)
Renewable energy facilities in service, net
 
4,939,314

 
4,990,127

Construction in progress - renewable energy facilities
 
2,917

 
3,124

Total renewable energy facilities, net
 
$
4,942,231

 
$
4,993,251


Depreciation expense related to renewable energy facilities was $52.2 million and $49.2 million for the three months ended March 31, 2017 and 2016, respectively.

Construction in progress represents costs incurred to complete the construction of the facilities in the Company's current portfolio that were acquired from SunEdison. All construction in progress costs are stated at SunEdison's historical cost.

As of March 31, 2017 and December 31, 2016, the Company reclassified $549.7 million and $548.7 million, respectively, from renewable energy facilities, net to non-current assets held for sale in the unaudited condensed consolidated balance sheets (see Note 2. Assets Held for Sale).

4. INTANGIBLES

The following table presents the gross carrying amount, accumulated amortization and net book value of intangibles as of March 31, 2017:
(In thousands, except weighted average amortization period)
 
Weighted Average Amortization Period
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book Value
Favorable rate revenue contracts
 
15 years
 
$
715,377

 
$
(68,915
)
 
$
646,462

In-place value of market rate revenue contracts
 
19 years
 
518,442

 
(53,667
)
 
464,775

Favorable rate land leases
 
18 years
 
15,800

 
(1,730
)
 
14,070

Total intangible assets, net
 
 
 
$
1,249,619

 
$
(124,312
)
 
$
1,125,307

 
 
 
 
 
 
 
 
 
Unfavorable rate revenue contracts
 
7 years
 
$
35,086

 
$
(11,880
)
 
$
23,206

Unfavorable rate O&M contracts
 
3 years
 
5,000

 
(1,615
)
 
3,385

Unfavorable rate land lease
 
16 years
 
1,000

 
(120
)
 
880

Total intangible liabilities, net
 
 
 
$
41,086

 
$
(13,615
)
 
$
27,471



17




    
The following table presents the gross carrying amount, accumulated amortization and net book value of intangibles as of December 31, 2016:
(In thousands, except weighted average amortization period)
 
Weighted Average Amortization Period
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book Value
Favorable rate revenue contracts
 
16 years
 
$
714,758

 
$
(57,634
)
 
$
657,124

In-place value of market rate revenue contracts
 
20 years
 
518,003

 
(47,284
)
 
470,719

Favorable rate land leases
 
18 years
 
15,800

 
(1,531
)
 
14,269

Total intangible assets, net
 
 
 
$
1,248,561

 
$
(106,449
)
 
$
1,142,112

 
 
 
 
 
 
 
 
 
Unfavorable rate revenue contracts
 
7 years
 
$
35,086

 
$
(10,541
)
 
$
24,545

Unfavorable rate O&M contracts
 
3 years
 
5,000

 
(1,302
)
 
3,698

Unfavorable rate land lease
 
16 years
 
1,000

 
(107
)
 
893

Total intangible liabilities, net
 
 
 
$
41,086

 
$
(11,950
)
 
$
29,136

    
The Company has intangible assets related to revenue contracts, representing long-term power purchase agreements ("PPAs") and renewable energy certificate ("REC") agreements, and favorable rate land leases that were obtained through acquisitions. The revenue contract intangible assets are comprised of favorable rate PPAs and REC agreements and the in-place value of market rate PPAs. The Company also has intangible liabilities related to unfavorable rate PPAs and REC agreements, unfavorable rate O&M contracts and an unfavorable rate land lease, which are classified within other long-term liabilities in the unaudited condensed consolidated balance sheets. These intangible assets and liabilities are amortized on a straight-line basis over the remaining lives of the agreements, which range from 1 to 28 years as of March 31, 2017.

Amortization expense related to favorable rate revenue contracts is reflected in the unaudited condensed consolidated statements of operations as a reduction of operating revenues, net. Amortization related to unfavorable rate revenue contracts is reflected in the unaudited condensed consolidated statements of operations as an increase to operating revenues, net. During the three months ended March 31, 2017 and 2016, net amortization expense related to favorable and unfavorable rate revenue contracts resulted in a reduction of operating revenues, net of $9.8 million and $10.5 million, respectively.

Amortization expense related to the in-place value of market rate revenue contracts is reflected in the unaudited condensed consolidated statements of operations within depreciation, accretion and amortization expense. During the three months ended March 31, 2017 and 2016, amortization expense related to the in-place value of market rate revenue contracts was $6.4 million and $6.8 million, respectively.

Amortization expense related to favorable rate land leases is reflected in the unaudited condensed consolidated statements of operations within cost of operations. Amortization related to the unfavorable rate land lease and unfavorable rate O&M contracts is reflected in the unaudited condensed consolidated statements of operations as a reduction of cost of operations. During the three months ended March 31, 2017 and 2016, net amortization related to favorable and unfavorable rate land leases and unfavorable rate O&M contracts resulted in a $0.1 million reduction of cost of operations and $0.2 million increase to cost of operations, respectively.

5. VARIABLE INTEREST ENTITIES

The Company consolidates variable interest entities ("VIEs") in renewable energy facilities when the Company is the primary beneficiary. The VIEs own and operate renewable energy facilities in order to generate contracted cash flows. The VIEs were funded through a combination of equity contributions from the owners and non-recourse project-level debt. No VIEs were deconsolidated during the three months ended March 31, 2017 and 2016.


18





The carrying amounts and classification of the consolidated VIEs’ assets and liabilities included in the Company's unaudited condensed consolidated balance sheets are as follows:
(In thousands)
 
March 31, 2017
 
December 31, 2016
Current assets
 
$
179,648

 
$
191,244

Non-current assets
 
4,315,546

 
4,351,635

Total assets
 
$
4,495,194

 
$
4,542,879

Current liabilities
 
$
645,232

 
$
638,452

Non-current liabilities
 
512,554

 
514,464

Total liabilities
 
$
1,157,786

 
$
1,152,916


The amounts shown in the table above exclude intercompany balances that are eliminated upon consolidation. All of the assets in the table above are restricted for settlement of the VIE obligations, and all of the liabilities in the table above can only be settled by using VIE resources.

6. LONG-TERM DEBT
    
Long-term debt consists of the following: 
(In thousands, except rates)
 
March 31, 2017
 
December 31, 2016
 
Interest Type
 
Interest Rate (%)1
 
Financing Type
Corporate-level long-term debt2:
 
 
 
 
 
 
 
 
 
 
Senior Notes due 2023
 
$
950,000

 
$
950,000

 
Fixed
 
6.38
 
Senior notes
Senior Notes due 2025
 
300,000

 
300,000

 
Fixed
 
6.63
 
Senior notes
Revolver
 
547,000

 
552,000

 
Variable
 
4.06
 
Revolving loan
Non-recourse long-term debt3:
 
 
 
 
 
 
 
 
 
 
Permanent financing
 
2,149,437

 
2,078,009

 
Blended4
 
5.915
 
Term debt / Senior notes
Financing lease obligations
 
122,769

 
123,930

 
Imputed
 
5.635
 
Financing lease obligations
Total principal due for long-term debt and financing lease obligations
 
4,069,206

 
4,003,939

 
 
 
5.815
 
 
Unamortized discount, net
 
(14,326
)
 
(13,620
)
 
 
 
 
 
 
Deferred financing costs, net
 
(38,470
)
 
(39,405
)
 
 
 
 
 
 
Less current portion of long-term debt and financing lease obligations6
 
(2,202,661
)
 
(2,212,968
)
 
 
 
 
 
 
Long-term debt and financing lease obligations, less current portion7
 
$
1,813,749

 
$
1,737,946

 
 
 
 
 
 
———
(1)
As of March 31, 2017.
(2)
Corporate-level debt represents debt issued by Terra Operating LLC and guaranteed by Terra LLC and certain subsidiaries of Terra Operating LLC other than non-recourse subsidiaries as defined in the relevant debt agreements.
(3)
Non-recourse debt represents debt issued by subsidiaries with no recourse to Terra LLC, Terra Operating LLC or guarantors of the Company's corporate-level debt, other than limited or capped contingent support obligations, which in aggregate are not considered to be material to the Company's business and financial condition.
(4)
Includes variable rate debt and fixed rate debt. As of March 31, 2017, 53% of this balance had a variable interest rate and the remaining 47% of this balance had a fixed interest rate. The Company has entered into interest rate swap agreements to fix the interest rates of certain variable rate permanent financing non-recourse debt (see Note 8. Derivatives).
(5)
Represents the weighted average interest rate as of March 31, 2017.
(6)
As of March 31, 2017 and December 31, 2016, the Company reclassified $14.7 million from current portion of long-term debt and financing lease obligations to current liabilities related to assets held for sale in the unaudited condensed consolidated balance sheets (see Note 2. Assets Held for Sale).


19




(7)
As of March 31, 2017 and December 31, 2016, the Company reclassified $353.9 million from long-term debt and financing lease obligations, less current portion to non-current liabilities related to assets held for sale in the unaudited condensed consolidated balance sheets (see Note 2. Assets Held for Sale).

Corporate-level Long-term Debt

Revolving Credit Facility

In conjunction with a consent agreement that Terra Operating LLC entered into in September of 2016 with the Administrative Agent and other parties to the Revolver, which provided consent for the cross-collateralization of certain utility-scale assets located in Canada owned by subsidiaries of the Company, and as a result of the Company's election in February of 2017 to increase the principal amount of the credit facility described in the "Canada project-level financing" section below, Terra Operating LLC repaid an additional $5.0 million of Revolver indebtedness on March 6, 2017 and permanently reduced the revolving commitments and borrowing capacity by such amount.

The terms of the Revolver require the Company to provide audited annual financial statements within 90 days after the end of the fiscal year, with a 10-business day cure period. On April 5, 2017, Terra Operating LLC entered into a tenth amendment to the terms of the Revolver, which provided that the date on which the Company must deliver to the Administrative Agent and other parties to the Revolver its annual financial statements and accompanying audit report with respect to fiscal year 2016 and its financial plan for fiscal year 2017 would be extended to April 28, 2017.

On April 26, 2017, the Company entered into an eleventh amendment to the terms of the Revolver, which further extended the due date for delivery of its 2016 annual financial statements and accompanying audit report to the earlier of (a) July 15, 2017 and (b) the tenth business day prior to the date on which the failure to deliver such financial statements would constitute an event of default under the indenture dated as of January 28, 2015 (as supplemented) with respect to the Senior Notes due 2023 (the "2023 Indenture"). As discussed below, an event of default would not have occurred under the 2023 Indenture until July 31, 2017. The Company's Form 10-K for the year ended December 31, 2016 was filed within the 10-business day cure period that commenced on July 15, 2017, and consequently no event of default occurred under the Revolver with respect to the 2016 10-K filing. The amendment also extended the due date for delivery to the Administrative Agent and other parties to the Revolver for the Company's financial statements and accompanying information with respect to the fiscal quarter ended March 31, 2017 to July 31, 2017 and with respect to the fiscal quarters ending June 30, 2017 and September 30, 2017 to the date that is 75 days after the end of each such fiscal quarter, with a 10-business day cure period for each quarterly deliverable.

The eleventh amendment also amended the Debt Service Coverage Ratio (as defined therein) applicable to the fourth quarter of 2016 and first, second and third quarters of 2017 from 1.75:1.00 to 1.50:1.00 and amended the Leverage Ratio (as defined therein) applicable to the fourth quarter of 2016 from 6.00:1.00 to 6.50:1.00 and applicable to the first, second and third quarters of 2017 from 5.75:1.00 to 6.50:1.00. In addition, the amendment amended the definitions of Debt Service Coverage Ratio and Leverage Ratio to provide for, in each case, certain pro forma treatment of the repayment or refinancing of Non-Recourse Project Indebtedness (as defined therein) net of any new Non-Recourse Project Indebtedness incurred in connection with any such refinancing. Per the terms of the eleventh amendment, Terra Operating LLC agreed to prepay $50.0 million of revolving loans outstanding under the Revolver and permanently reduce the revolving commitments and borrowing capacity by such amount. This amount was repaid on May 3, 2017.

On July 25, 2017, Terra Operating LLC repaid an additional $150.0 million of Revolver indebtedness, a portion of which was paid using proceeds the Company received from the sale of the U.K. Portfolio as discussed in Note 2. Assets Held for Sale. There was no reduction in revolving commitments and borrowing capacity as a result of this repayment.

On August 10, 2017, the Company entered into a twelfth amendment to the terms of the Revolver which further extended the due dates for delivery to the Administrative Agent and other parties to the Revolver for the Company's financial statements and accompanying information with respect to the first quarter of 2017 to August 30, 2017, the second quarter of 2017 to September 30, 2017 and the third quarter of 2017 to December 15, 2017. In addition, the Administrative Agent and requisite lenders waived all defaults or events of default existing as of or prior to the effective date of the twelfth amendment, and the consequences thereof, in connection with a failure to comply with the covenants requiring the delivery of the financial statements and accompanying information with respect to the first quarter of 2017. The Company filed this Form 10-Q for the first quarter of 2017 prior to August 30, 2017, and consequently no event of default occurred under the Revolver with respect to this Form 10-Q.


20





Per the terms of the twelfth amendment, Terra Operating LLC agreed to permanently reduce the revolving commitments under the Revolver by $50.0 million. After giving effect to this reduction in revolving commitments, the total borrowing capacity under the Revolver was $520.0 million as of such date. There was no additional payment of principal on the Revolver made in connection with this commitment reduction.

Senior Notes due 2023 and Senior Notes due 2025

The Senior Notes due 2023 and the Senior Notes due 2025 require the Company to timely file with the SEC, or make publicly available, audited annual financial statements and unaudited quarterly financial statements no later than 60 days following the date required by the SEC's rules and regulations (including extensions thereof). The Company has a 90-day grace period from the date a notice of default is deemed to be duly given to Terra Operating LLC in accordance with the Senior Notes due 2023 and the Senior Notes due 2025.

On May 2, 2017, Terra Operating LLC received a notice from the trustee of an event of default for failure to deliver 2016 audited annual financial statements and thus had until July 31, 2017 to deliver its 2016 audited financial statements before an event of default would occur under the 2023 Indenture and the indenture dated as of July 17, 2015 (as supplemented) with respect to the Senior Notes due 2025 (the "2025 Indenture"). However, the Form 10-K for the year ended December 31, 2016 was filed with the SEC within the grace period for delivery, and consequently no event of default occurred with respect to the 2016 10-K filing.

On July 11, 2017, Terra Operating LLC received a notice from the trustee of an event of default for failure to comply with its obligation to timely furnish the Company's Form 10-Q for the first quarter of 2017. However, this Form 10-Q for the first quarter of 2017 was filed within the 90-day grace period that commenced on July 11, 2017, and consequently no event of default occurred with respect to this filing.

Refer to the Merger Agreement section below for discussion of the Company's successful completion of a solicitation of consents from holders of record as of 5:00 p.m., New York City time, on August 1, 2017 of its Senior Notes due 2023 and its Senior Notes due 2025 to obtain a waiver of the requirement to make an offer to repurchase the Senior Notes issued under the respective indentures upon the occurrence of a change of control that would result from the consummation of the Merger.
    
Non-recourse Long-term Debt

Indirect subsidiaries of the Company have incurred long-term debt obligations with respect to the renewable energy facilities that those subsidiaries own directly or indirectly. The indebtedness of these subsidiaries is typically secured by the renewable energy facility's assets (mainly the renewable energy facility) or equity interests in such renewable energy facilities with no recourse to Terra LLC or Terra Operating LLC other than limited or capped contingent support obligations, which in aggregate are not considered to be material to the Company's business and financial condition. In connection with these financings and in the ordinary course of its business, the Company and its subsidiaries observe formalities and operating procedures to maintain each of their separate existence and can readily identify each of their separate assets and liabilities as separate and distinct from each other. As a result, these subsidiaries are legal entities that are separate and distinct from TerraForm Power, Terra LLC, Terra Operating LLC and the guarantors under the Revolver, the Senior Notes due 2023 and Senior Notes due 2025.

Canada project-level financing

On November 2, 2016, certain of the Company's subsidiaries entered into a new non-recourse loan financing in an aggregate principal amount of $120.0 million Canadian dollars ("CAD"), including a CAD $6.9 million letter of credit, secured by approximately 40 MW(ac) of utility-scale solar power plants located in Canada that are owned by the Company's subsidiaries. On February 28, 2017, the Company increased the principal amount of the credit facility by an additional CAD $113.9 million (including an additional CAD $6.7 million letter of credit), increasing the total facility to CAD $233.9 million. The proceeds of this additional financing are expected to be used for general corporate purposes and were used to pay down an additional $5.0 million on the Revolver as described above.



21




Non-recourse Portfolio Term Loan Prepayment

The Company has a non-recourse portfolio term loan with an outstanding principal balance of $469.8 million as of March 31, 2017 (the "Midco Portfolio Term Loan") that is secured by indirect equity interests in approximately 1,104.3 MW of the Company's renewable energy facilities, consisting of assets acquired from Invenergy Wind Global LLC (together with its subsidiaries, "Invenergy Wind") and certain other renewable energy facilities acquired from SunEdison. The loan matures on January 15, 2019, to the extent the Company exercises its extension options. The Company exercised the first two extension options in January and July of 2017, respectively. In June of 2017, the Company agreed to make a $100.0 million prepayment for this loan in connection with obtaining (i) a waiver to extend the 2016 audited project financial statement deadline under the loan agreement and (ii) a waiver of the change of control default that would arise under this loan agreement as a result of the Merger until, in the case of the change of control waiver, the date that is the earlier of three months following the closing of the Merger and March 31, 2018. This prepayment was made using a portion of the proceeds the Company received from the sale of the U.K. Portfolio as discussed in Note 2. Assets Held for Sale.

Non-recourse Debt Defaults

A SunEdison Debtor is a party to or guarantor of a material project agreement, such as asset management or O&M contracts, for most of the Company's non-recourse financing arrangements. As a result of the SunEdison Bankruptcy and delays in delivery of 2015 audited financial statements for the Company and/or certain project-level subsidiaries, among other things, the Company experienced defaults under most of its non-recourse financing agreements in 2016. During the course of 2016 and to date in 2017, the Company cured or obtained waivers or temporary forbearances with respect to most of these defaults and has transitioned, or is working to transition, the project-level services provided by SunEdison Debtors to third parties or in-house to a Company affiliate; however, certain of these defaults persist. Moreover, the Company has experienced additional defaults under most of the same non-recourse financing agreements in 2017 as the result of the failure to timely complete Company and/or project-level audits. The Company filed its Form 10-K for the year ended December 31, 2016 on July 21, 2017 and is working to complete the remaining project-level audits and seeking to obtain waivers of such default. For certain of these defaults, the corresponding contractual grace periods already expired as of the respective financial statement issuance date or the Company could not assert that it was probable that the violation would be cured within any remaining grace periods, would be cured for a period of more than twelve months or were not likely to recur. In addition, while the Company has been actively negotiating with the lenders to obtain waivers, the lenders have not currently waived or subsequently lost the right to demand repayment for more than one year from the balance sheet date with respect to certain of these defaults. As these defaults occurred prior to the issuance of the financial statements for the three months ended March 31, 2017 and for the year ended December 31, 2016, $1.6 billion of the Company's non-recourse long-term indebtedness, net of unamortized debt discounts and deferred financing costs, was reclassified to current in the unaudited condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016, as the Company accounts for debt in default as of the date the financial statements are issued in the same manner as if the default existed as of the balance sheet date. Amortization of deferred financing costs and debt discounts continue to be amortized over the maturities of the respective financing agreements as before the violations, as the Company believes there is a reasonable likelihood that it will be able to successfully negotiate a waiver with the lenders and/or cure the defaults.

As a result of these defaults, the Company also reclassified $78.9 million and $65.3 million of long-term restricted cash to current as of March 31, 2017 and December 31, 2016, respectively, consistent with the corresponding debt classification, as the restrictions that required the cash balances to be classified as long-term restricted cash were driven by the financing agreements. As of March 31, 2017 and December 31, 2016, $21.4 million and $67.1 million, respectively, of cash and cash equivalents was also reclassified to current restricted cash as the cash balances were subject to distribution restrictions related to debt defaults that existed as of the respective balance sheet date. $33.8 million of the December 31, 2016 reclassification amount was reclassified from current restricted cash to assets held for sale as it related to the portfolios discussed in Note 2. Assets Held for Sale. There was no similar reclassification to assets held for sale for the March 31, 2017 reclassification amount. Refer to Note 8. Derivatives for discussion of corresponding interest rate swap reclassifications to current as a result of these defaults.



22




Maturities

The aggregate contractual payments of long-term debt due after March 31, 2017, including financing lease obligations and excluding amortization of debt discounts, premiums and deferred financing costs, as stated in the financing agreements, are as follows:
(In thousands)
Remainder of 20171
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Maturities of long-term debt as of March 31, 20172
$
733,218

 
$
114,066

 
$
453,956

 
$
100,748

 
$
104,271

 
$
2,562,947

 
$
4,069,206

———
(1)
Includes $547.0 million of Revolver indebtedness as management intends to repay this indebtedness during 2017 ($200.0 million of which was paid prior to the financial statement issuance date as discussed above). Also includes $100.0 million prepayment for the Midco Portfolio Term Loan, which the Company agreed to pay in June of 2017 in connection with obtaining (i) a waiver to extend the 2016 audited project financial statement deadline under the loan agreement and (ii) a waiver of the change of control default that would arise under the loan agreement as a result of the Merger until, in the case of the change of control waiver, the date that is the earlier of three months following the closing of the Merger and March 31, 2018. This prepayment was made using a portion of the proceeds the Company received from the sale of the U.K. Portfolio as discussed in Note 2. Assets Held for Sale.
(2)
Represents the contractual principal payment due dates for the Company's long-term debt and does not reflect the reclassification of $1.6 billion of long-term debt to current as a result of debt defaults under certain of the Company's non-recourse financing arrangements, except for the $100.0 million related to the prepayment discussed directly above (which is classified as current as of March 31, 2017 as this payment was made prior to the issuance of the financial statements in connection with obtaining a waiver of the debt default under the loan agreement).

Merger Agreement

As discussed in Note 1. Nature of Operations and Basis of Presentation, on March 6, 2017, TerraForm Power entered into the Merger Agreement with Orion Holdings and Merger Sub, which are both affiliates of Brookfield. The closing of the Merger is subject to certain conditions as previously described. There is no financing condition to the consummation of the transactions contemplated by the Merger Agreement. Pursuant to the Merger Agreement, the Company has agreed to provide cooperation as reasonably requested by Orion Holdings in its efforts to obtain debt financing that is to be made available to the Company from and after the closing of the Merger. Certain lenders have committed, upon the terms and subject to the conditions set forth in debt commitment letters provided to Orion Holdings, to provide certain financing to repay, refinance, redeem, defease or otherwise repurchase certain Company indebtedness. 

In addition, the Merger Agreement provides that, at or prior to the effective time of the Merger, TerraForm Power will enter into a revolving credit line agreement, substantially consistent with the term sheet as agreed between Orion Holdings and TerraForm Power as of the date of the Merger Agreement (the “Sponsor Line Agreement”), by and among TerraForm Power and Brookfield or its affiliates pursuant to which Brookfield or its affiliates will commit up to a $500 million secured revolving credit line to TerraForm Power for use to acquire renewable energy assets or for profit improving capital expenditures.

The closing of the Merger would trigger a change in control under the terms of the Revolver. Such change in control constitutes an event of default under the Revolver and would entitle the Revolver lenders to accelerate the principal amount outstanding under the Revolver. The Company intends to pay down and terminate the Revolver concurrently with consummating the Merger through a refinancing transaction. However, there can be no assurance that the Company will be able to enter into a replacement credit facility or otherwise secure financing on equal or more favorable terms. Such inability could have a materially adverse effect on the Company's liquidity and growth strategy.

The closing of the Merger would also have triggered a change in control under the 2023 Indenture and the 2025 Indenture. The 2023 Indenture and the 2025 Indenture require the Company to make an offer to repurchase the Senior Notes issued under the respective indentures at 101% of the applicable principal amount, plus accrued and unpaid interest and additional interest, if any, to the repurchase date following a change in control. However, on August 11, 2017, the Company announced the successful completion of a solicitation of consents from holders of record as of 5:00 p.m., New York City time, on August 1, 2017 of its Senior Notes due 2023 and its Senior Notes due 2025 to obtain a waiver of the requirement to make an offer to repurchase the Senior Notes issued under the respective indentures upon the occurrence of a change of control that would result from the consummation of the Merger, in each case among Terra Operating LLC, as issuer, the guarantors party thereto and U.S. Bank National Association, as trustee. Terra Operating LLC received validly delivered and unrevoked consents from the holders of a majority of the aggregate principal amount of each series of the Senior Notes outstanding as of the record


23




date and paid a consent fee to each consenting holder of $1.25 per $1,000 principal amount of such series of the Senior Notes for which such holder delivered its consent.

In addition to the change of control waiver, Terra Operating LLC also received consents to effect on the closing date of the Merger certain amendments to the 2023 Indenture and the 2025 Indenture. The amendments would amend the definition of "Permitted Holder" under the respective indentures (which is referred to in the definition of change of control) to replace the references to "the Sponsor" therein with "Brookfield Asset Management, Inc. (or its successors and assigns)." Subject to the closing of the Merger, Terra Operating LLC will be obligated to effectuate the amendments and pay a success fee of $1.25 per $1,000 principal amount of each series of the Senior Notes for which such consenting holder delivered its consent. Terra Operating LLC will be under no obligation to effectuate the amendments or pay the success fee if the Merger is not consummated for any reason.

A limited number of the Company's non-recourse financing arrangements also include change in control provisions that would permit the counterparty to terminate the contract or accelerate maturity following the consummation of the Merger. The Company is working to obtain consents or waivers from those counterparties to the applicable change of control provisions, however, there is no assurance those consents will be obtained.

7. INCOME TAXES

The income tax provision consisted of the following:

 
Three Months Ended March 31,
(In thousands, except effective tax rate)
 
2017
 
2016
Loss before income tax (benefit) expense
 
$
(57,191
)
 
$
(33,408
)
Income tax (benefit) expense
 
(918
)
 
97

Effective tax rate
 
1.6
%
 
(0.3
)%

As of March 31, 2017, TerraForm Power owned 65.7% of Terra LLC and consolidated the results of Terra LLC through its controlling interest. The Company records SunEdison's 34.3% ownership of Terra LLC as a non-controlling interest in the financial statements. Terra LLC is treated as a partnership for income tax purposes. As such, the Company records income tax on its 65.7% of Terra LLC's taxable income and SunEdison records income tax on its 34.3% share of Terra LLC's taxable income.

For the three months ended March 31, 2017 and 2016, the overall effective tax rate was different than the statutory rate of 35% primarily due to the recording of a valuation allowance on certain tax benefits attributed to the Company, loss allocated to non-controlling interests and the effect of state taxes. As of March 31, 2017, most jurisdictions were in a net deferred tax asset position. A valuation allowance is recorded against the deferred tax assets primarily because of the history of losses in those jurisdictions. As of March 31, 2017, the Company had not identified any uncertain tax positions for which a liability was required.

8. DERIVATIVES

As part of the Company’s risk management strategy, the Company has entered into derivative instruments which include interest rate swaps, foreign currency contracts and commodity contracts to mitigate interest rate, foreign currency and commodity price exposure. If the Company elects to do so and if the instrument meets the criteria specified in ASC 815, Derivatives and Hedging, the Company designates its derivative instruments as cash flow hedges. The Company enters into interest rate swap agreements in order to hedge the variability of expected future cash interest payments. Foreign currency contracts are used to reduce risks arising from the change in fair value of certain foreign currency denominated assets and liabilities. The objective of these practices is to minimize the impact of foreign currency fluctuations on operating results. The Company also enters into commodity contracts to economically hedge price variability inherent in electricity sales arrangements. The objectives of the commodity contracts are to minimize the impact of variability in spot electricity prices and stabilize estimated revenue streams. The Company does not use derivative instruments for speculative purposes.



24




As of March 31, 2017 and December 31, 2016, fair values of the following derivative instruments were included in the balance sheet captions indicated below:
 
 
Fair Value of Derivative Instruments
 
 
 
 
 
 
 
 
Hedging Contracts
 
Derivatives Not Designated as Hedges
 
 
 
 
 
 
(In thousands)
 
Interest Rate Swaps
 
Commodity Contracts
 
Interest Rate Swaps
 
Foreign Currency Contracts
 
Commodity Contracts
 
Gross Amounts of Assets/Liabilities Recognized
 
Gross Amounts Offset in Consolidated Balance Sheet
 
Net Amounts in Consolidated Balance Sheet
As of March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
$
1,626

 
$
8,112

 
$

 
$
835

 
$
12,491

 
$
23,064

 
$

 
$
23,064

Other assets
 
418

 
79,206

 

 
202

 
23,988

 
103,814

 

 
103,814

Total assets
 
$
2,044

 
$
87,318

 
$

 
$
1,037

 
$
36,479

 
$
126,878

 
$

 
$
126,878

Accounts payable, accrued expenses and other current liabilities
 
$
10,066

 
$

 
$
737

 
$

 
$

 
$
10,803

 
$

 
$
10,803

Liabilities related to assets held for sale
 

 

 
3,119

 

 

 
3,119

 

 
3,119

Other long-term liabilities
 

 

 

 

 

 

 

 

Non-current liabilities related to assets held for sale
 

 

 
18,275

 

 

 
18,275

 

 
18,275

Total liabilities
 
$
10,066

 
$

 
$
22,131

 
$

 
$

 
$
32,197

 
$

 
$
32,197

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
$
1,150

 
$
3,664

 
$

 
$
953

 
$
12,028

 
$
17,795

 
$

 
$
17,795

Other assets
 
411

 
62,474

 

 
460

 
25,167

 
88,512

 

 
88,512

Total assets
 
$
1,561

 
$
66,138

 
$

 
$
1,413

 
$
37,195

 
$
106,307

 
$

 
$
106,307

Accounts payable, accrued expenses and other current liabilities
 
$
10,689

 
$

 
$
814

 
$

 
$

 
$
11,503

 
$

 
$
11,503

Liabilities related to assets held for sale
 

 

 
4,041

 

 

 
4,041

 

 
4,041

Other long-term liabilities
 
47

 

 

 

 

 
47

 

 
47

Non-current liabilities related to assets held for sale
 

 

 
16,786

 

 

 
16,786

 

 
16,786

Total liabilities
 
$
10,736

 
$

 
$
21,641

 
$

 
$

 
$
32,377

 
$

 
$
32,377




25




As of March 31, 2017 and December 31, 2016, notional amounts for derivative instruments consisted of the following:
 
 
Notional Amount as of
(In thousands)
 
March 31, 2017
 
December 31, 2016
Derivatives designated as hedges:
 
 
 
 
Interest rate swaps (USD)
 
425,744

 
433,874

Interest rate swaps (CAD)
 
163,668

 
84,713

Commodity contracts (MWhs)
 
16,610

 
16,988

Derivatives not designated as hedges:
 
 
 
 
Interest rate swaps (USD)
 
14,655

 
14,681

Interest rate swaps (GBP)
 
222,018

 
222,018

Foreign currency contracts (CAD)
 
21,875

 
25,075

Commodity contracts (MWhs)
 
1,275

 
1,407


The Company has elected to present net derivative assets and liabilities on the balance sheet as a right to setoff exists. For interest rate swaps, the Company either nets derivative assets and liabilities on a trade-by-trade basis or nets them in accordance with a master netting arrangement if such an arrangement exists with the counterparties. Foreign currency contracts are netted by currency in accordance with a master netting arrangement. The Company has a master netting arrangement for its commodity contracts for which no amounts were netted as of March 31, 2017 as each of the commodity contracts were in a gain position.

Gains and losses on derivatives not designated as hedges for the three months ended March 31, 2017 and 2016 consisted of the following:
 
 
Location of Loss (Gain) in the Statements of Operations
 
Three Months Ended March 31,
(In thousands)
2017
 
2016
Interest rate swaps
 
Interest expense, net
 
$
1,374

 
$
540

Foreign currency contracts
 
Loss on foreign currency exchange, net
 
213

 
536

Commodity contracts
 
Operating revenues, net
 
(4,113
)
 
(8,461
)

Gains and losses recognized related to interest rate swaps and commodity contracts designated as cash flow hedges for the three months ended March 31, 2017 and 2016 consisted of the following:
 
 
Three Months Ended March 31,
 
 
Gain (Loss) Recognized in Other Comprehensive Income (Effective Portion) net of taxes1
 
Location of Amount Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)
 
Amount of (Gain) Loss Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)
 
Amount of (Gain) Loss Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
(In thousands)
 
2017
 
2016
 
 
2017
 
2016
 
2017
 
2016
Interest rate swaps
 
$
(1,619
)
 
$
(32,193
)
 
Interest expense, net
 
$
2,861

 
$
3,433

 
$
(326
)
 
$
328

Commodity contracts
 
15,673

 
(772
)
 
Operating revenues, net
 
(3,247
)
 
(3,064
)
 
(2,918
)
 
2,188

Total
 
$
14,054

 
$
(32,965
)
 
 
 
$
(386
)
 
$
369

 
$
(3,244
)
 
$
2,516

————
(1)
Net of taxes of $5.8 million attributed to commodity contracts during the three months ended March 31, 2017. There were no taxes attributed to interest rate swaps during the three months ended March 31, 2017, and there were no taxes attributed to derivatives designated as cash flow hedges during the three months ended March 31, 2016.

As of March 31, 2017 and December 31, 2016, the Company had posted letters of credit in the amount of $15.0 million and $18.0 million, respectively, as collateral related to certain commodity contracts. Certain derivative contracts contain provisions providing the counterparties a lien on specific assets as collateral. There was no cash collateral received or pledged as of March 31, 2017 and December 31, 2016 related to the Company's derivative transactions.


26





Derivatives Designated as Hedges

Interest Rate Swaps

The Company has interest rate swap agreements to hedge variable rate non-recourse debt. These interest rate swaps qualify for hedge accounting and were designated as cash flow hedges. Under the interest rate swap agreements, the renewable energy facilities pay a fixed rate and the counterparties to the agreements pay a variable interest rate. The amounts deferred in other comprehensive income and reclassified into earnings during the three months ended March 31, 2017 and 2016 related to the interest rate swaps are provided in the tables above. The loss expected to be reclassified into earnings over the next twelve months is approximately $4.8 million. The maximum term of outstanding interest rate swaps designated as hedges is 17 years.

As discussed in Note 6. Long-term debt, the Company experienced defaults under certain of its non-recourse financing agreements prior to the issuance of the financial statements for the three months ended March 31, 2017 and for the year ended December 31, 2016. As the Company's interest rate swap agreements contain cross-default provisions, $4.5 million and $4.8 million of related liabilities have been reclassified to current as of March 31, 2017 and December 31, 2016, respectively. The Company is actively working with the counterparties to cure these defaults and obtain waivers as necessary. The Company does not currently expect any changes to the underlying cash flows as a result of these defaults and thus has determined that there is no impact to the swaps' qualification for hedge accounting and designation as cash flow hedges.

Commodity Contracts

The Company has long-dated physically delivered commodity contracts that hedge variability in cash flows associated with the sales of power from certain renewable energy facilities located in Texas. These commodity contracts qualify for hedge accounting and are designated as cash flow hedges. Accordingly, the effective portions of the change in fair value of these derivatives are reported in accumulated other comprehensive income and subsequently reclassified to earnings in the periods when the hedged transactions affect earnings. Any ineffective portions of the derivatives’ change in fair value are recognized currently in earnings. The amounts deferred in other comprehensive income and reclassified into earnings during the three months ended March 31, 2017 and 2016 related to the commodity contracts are provided in the tables above. The gain expected to be reclassified into earnings over the next twelve months is approximately $6.5 million. The maximum term of outstanding commodity contracts designated as hedges is 13 years.

Derivatives Not Designated as Hedges

Interest Rate Swaps

The Company has interest rate swap agreements that economically hedge the cash flows for non-recourse debt. These interest rate swaps pay a fixed rate and the counterparties to the agreements pay a variable interest rate. The changes in fair value are recorded in interest expense, net in the unaudited condensed consolidated statements of operations as these hedges are not accounted for under hedge accounting.

As discussed in Note 6. Long-term debt, the Company experienced defaults under certain of its non-recourse financing agreements prior to the issuance of the financial statements for the three months ended March 31, 2017 and for the year ended December 31, 2016. As the Company's interest rate swap agreements contain cross-default provisions, $0.5 million of related liabilities have been reclassified to current as of March 31, 2017 and December 31, 2016. The Company is actively working with the counterparties to cure these defaults and obtain waivers as necessary.

As of March 31, 2017 and December 31, 2016, the Company reclassified $3.1 million and $4.0 million, respectively, of current derivative liabilities to liabilities related to assets held for sale and $18.3 million and $16.8 million, respectively, of non-current derivative liabilities to non-current liabilities related to assets held for sale. These pertain to interest rate swap agreements for the U.K. Portfolio that were previously designated as cash flow hedges. The Company discontinued hedge accounting for these interest rate swaps during the second quarter of 2016 and the changes in fair value are now recorded through earnings.



27




Foreign Currency Contracts

The Company has foreign currency contracts in order to economically hedge its exposure to foreign currency fluctuations. The settlement of these hedges occurs on a quarterly basis through maturity. As these hedges are not accounted for under hedge accounting, the changes in fair value are recorded in loss (gain) on foreign currency exchange, net in the unaudited condensed consolidated statements of operations.

Commodity Contracts

The Company has commodity contracts in order to economically hedge commodity price variability inherent in certain electricity sales arrangements. If the Company sells electricity to an independent system operator market and there is no PPA available, it may enter into a commodity contract to hedge all or a portion of their estimated revenue stream. These commodity contracts require periodic settlements in which the Company receives a fixed-price based on specified quantities of electricity and pays the counterparty a variable market price based on the same specified quantity of electricity. As these hedges are not accounted for under hedge accounting, the changes in fair value are recorded in operating revenues net, in the unaudited condensed consolidated statements of operations.

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of assets and liabilities are determined using either unadjusted quoted prices in active markets (Level 1) or pricing inputs that are observable (Level 2) whenever that information is available and using unobservable inputs (Level 3) to estimate fair value only when relevant observable inputs are not available. The Company uses valuation techniques that maximize the use of observable inputs. Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. If the inputs into the valuation are not corroborated by market data, in such instances, the valuation for these contracts is established using techniques including extrapolation from or interpolation between actively traded contracts as well as calculation of implied volatilities. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized as Level 3. The Company regularly evaluates and validates the inputs used to determine fair value of Level 3 contracts by using pricing services to support the underlying market price of the commodity.

The Company uses a discounted cash flow valuation technique to fair value its derivative assets and liabilities. The primary inputs in the valuation models for commodity contracts are market observable forward commodity curves and risk-free discount rates and to a lesser degree credit spreads and volatilities. The primary inputs into the valuation of interest rate swaps and foreign currency contracts are forward interest rates, foreign currency exchange rates, and to a lesser degree credit spreads.

Recurring Fair Value Measurements

The following table summarizes the financial instruments measured at fair value on a recurring basis classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation in the unaudited condensed consolidated balance sheets:
(In thousands)
As of March 31, 2017
 
As of December 31, 2016
Assets
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swaps
$

 
$
2,044

 
$

 
$
2,044

 
$

 
$
1,561

 
$

 
$
1,561

Commodity contracts

 
36,479

 
87,318

 
123,797

 

 
37,195

 
66,138

 
103,333

Foreign currency contracts

 
1,037

 

 
1,037

 

 
1,413

 

 
1,413

Total derivative assets
$

 
$
39,560

 
$
87,318

 
$
126,878

 
$

 
$
40,169

 
$
66,138

 
$
106,307

Liabilities