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EX-32 - EXHIBIT 32 - TerraForm Power NY Holdings, Inc.terraform-93017xexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - TerraForm Power NY Holdings, Inc.terraform-93017xexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - TerraForm Power NY Holdings, Inc.terraform-93017xexhibit311.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 September 30, 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
 ______________________________________________________________
image0a15.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  x    No  o
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  x    No  o
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 October 31, 2017, there were 148,224,429 shares of Class A 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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Operating revenues, net
$
153,430

 
$
178,118

 
$
474,932

 
$
519,336

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of operations
41,859

 
32,820

 
108,402

 
94,534

Cost of operations - affiliate
1,199

 
7,149

 
10,224

 
22,898

General and administrative expenses
21,664

 
26,510

 
99,644

 
64,750

General and administrative expenses - affiliate
2,192

 
2,943

 
6,893

 
10,614

Acquisition and related costs

 

 

 
2,743

Impairment of renewable energy facilities

 

 
1,429

 

Depreciation, accretion and amortization expense
61,830

 
57,988

 
186,039

 
178,026

Total operating costs and expenses
128,744

 
127,410

 
412,631

 
373,565

Operating income
24,686

 
50,708

 
62,301

 
145,771

Other expenses (income):
 
 
 
 
 
 
 
Interest expense, net
70,232

 
72,818

 
206,749

 
243,111

Gain on sale of renewable energy facilities

 

 
(37,116
)
 

(Gain) loss on foreign currency exchange, net
(1,078
)
 
3,913

 
(5,695
)
 
4,161

Loss on receivables - affiliate

 

 

 
845

Other (income) expenses, net
(7,015
)
 
548

 
(4,882
)
 
692

Total other expenses, net
62,139

 
77,279

 
159,056

 
248,809

Loss before income tax (benefit) expense
(37,453
)
 
(26,571
)
 
(96,755
)
 
(103,038
)
Income tax (benefit) expense
(2,633
)
 
1,140

 
(4,982
)
 
3,115

Net loss
(34,820
)
 
(27,711
)
 
(91,773
)
 
(106,153
)
Less: Net income attributable to redeemable non-controlling interests
6,803

 
4,642

 
18,162

 
16,374

Less: Net loss attributable to non-controlling interests
(15,077
)
 
(6,182
)
 
(59,045
)
 
(74,968
)
Net loss attributable to Class A common stockholders
$
(26,546
)
 
$
(26,171
)
 
$
(50,890
)
 
$
(47,559
)
 
 
 
 
 
 
 
 
Weighted average number of shares:
 
 
 
 
 
 
 
Class A common stock - Basic and diluted
92,352

 
90,860

 
92,228

 
89,140

Loss per share:
 
 
 
 
 
 
 
Class A common stock - Basic and diluted
$
(0.31
)
 
$
(0.29
)
 
$
(0.62
)
 
$
(0.53
)


See accompanying notes to unaudited condensed consolidated financial statements.

3



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



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net loss
 
$
(34,820
)
 
$
(27,711
)
 
$
(91,773
)
 
$
(106,153
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
Net unrealized gain (loss) arising during the period
 
6,535

 
(6,158
)
 
12,136

 
(2,442
)
Reclassification of net realized loss into earnings1
 

 

 
14,741

 

Hedging activities:
 
 
 
 
 
 
 
 
Net unrealized gain (loss) arising during the period
 
17,338

 
14,258

 
27,960

 
(32,348
)
Reclassification of net realized loss (gain) into earnings2
 
94

 
3,164

 
(527
)
 
15,667

Other comprehensive income (loss), net of tax
 
23,967

 
11,264

 
54,310

 
(19,123
)
Total comprehensive loss
 
(10,853
)
 
(16,447
)
 
(37,463
)
 
(125,276
)
Less comprehensive income (loss) attributable to non-controlling interests:
 
 
 
 
 
 
 
 
Net income attributable to redeemable non-controlling interests
 
6,803

 
4,642

 
18,162

 
16,374

Net loss attributable to non-controlling interests
 
(15,077
)
 
(6,182
)
 
(59,045
)
 
(74,968
)
Foreign currency translation adjustments
 
1,967

 
(2,165
)
 
1,250

 
(668
)
Hedging activities
 
6,799

 
7,015

 
18,638

 
(6,151
)
Comprehensive income (loss) attributable to non-controlling interests
 
492

 
3,310

 
(20,995
)
 
(65,413
)
Comprehensive loss attributable to Class A common stockholders
 
$
(11,345
)
 
$
(19,757
)
 
$
(16,468
)
 
$
(59,863
)
———
(1)
Represents reclassification of the accumulated foreign currency translation loss for substantially all of the Company's portfolio of solar power plants located in the United Kingdom, as the Company's sale of these facilities closed in the second quarter of 2017 as discussed in Note 2. Assets Held for Sale. The pre-tax amount of $23.6 million was recognized within gain on sale of renewable energy facilities in the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2017.
(2)
Includes $15.9 million loss reclassification for the nine months ended September 30, 2016 that occurred subsequent to the Company's discontinuation of hedge accounting in the second quarter of 2016 for interest rate swaps pertaining to variable rate non-recourse debt for substantially all of the Company's portfolio of solar power plants located in the United Kingdom as discussed in Note 8. Derivatives. As discussed above, the Company's sale of these facilities closed in the second quarter of 2017.


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)


 
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
462,846

 
$
565,333

Restricted cash
126,083

 
114,950

Accounts receivable, net
104,841

 
89,461

Prepaid expenses and other current assets
62,550

 
61,749

Assets held for sale

 
61,523

Total current assets
756,320

 
893,016

 
 
 
 
Renewable energy facilities, net, including consolidated variable interest entities of $3,309,214 and $3,434,549 in 2017 and 2016, respectively
4,854,303

 
4,993,251

Intangible assets, net, including consolidated variable interest entities of $836,290 and $875,095 in 2017 and 2016, respectively
1,096,416

 
1,142,112

Deferred financing costs, net
4,585

 
7,798

Other assets
133,539

 
114,863

Restricted cash
26,080

 
2,554

Non-current assets held for sale

 
552,271

Total assets
$
6,871,243

 
$
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)


 
September 30, 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 $156,621 and $594,442 in 2017 and 2016, respectively
$
716,728

 
$
2,212,968

Accounts payable, accrued expenses and other current liabilities, including consolidated variable interest entities of $42,555 and $37,760 in 2017 and 2016, respectively
145,276

 
125,596

Deferred revenue
17,992

 
18,179

Due to SunEdison and affiliates, net
15,775

 
16,692

Liabilities related to assets held for sale

 
21,798

Total current liabilities
895,771

 
2,395,233

Long-term debt and financing lease obligations, less current portion, including consolidated variable interest entities of $781,464 and $375,726 in 2017 and 2016, respectively
2,864,666

 
1,737,946

Deferred revenue, less current portion
44,669

 
55,793

Deferred income taxes
32,889

 
27,723

Asset retirement obligations, including consolidated variable interest entities of $95,596 and $92,213 in 2017 and 2016, respectively
150,743

 
148,575

Other long-term liabilities
33,261

 
31,470

Non-current liabilities related to assets held for sale

 
410,759

Total liabilities
4,021,999

 
4,807,499

 
 
 
 
Redeemable non-controlling interests
198,031

 
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, 92,770,614 and 92,476,776 shares issued in 2017 and 2016, respectively, and 92,408,596 and 92,223,089 shares outstanding in 2017 and 2016, respectively
928

 
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
1,480,584

 
1,467,108

Accumulated deficit
(285,330
)
 
(234,440
)
Accumulated other comprehensive income
57,334

 
22,912

Treasury stock, 362,018 and 253,687 shares in 2017 and 2016, respectively
(5,381
)
 
(4,025
)
Total TerraForm Power, Inc. stockholders' equity
1,248,617

 
1,252,957

Non-controlling interests
1,402,596

 
1,465,042

Total stockholders' equity
2,651,213

 
2,717,999

Total liabilities, redeemable non-controlling interests and stockholders' equity
$
6,871,243

 
$
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) Income
 
 
 
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
294

 
8

 

 

 
5,018

 

 

 
(108
)
 
(1,356
)
 
3,670

 

 

 

 

 
3,670

Net loss1

 

 

 

 

 
(50,890
)
 

 

 

 
(50,890
)
 

 
(59,045
)
 

 
(59,045
)
 
(109,935
)
Net SunEdison investment

 

 

 

 
6,224

 

 

 

 

 
6,224

 
3,242

 

 

 
3,242

 
9,466

Other comprehensive income

 

 

 

 

 

 
34,422

 

 

 
34,422

 

 

 
19,888

 
19,888

 
54,310

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

 

 

 

 

 

 

 

 

 

 
(15,790
)
 

 

 
(15,790
)
 
(15,790
)
Deconsolidation of non-controlling interest in renewable energy facility

 

 

 

 

 

 

 

 

 

 
(8,713
)
 

 

 
(8,713
)
 
(8,713
)
Accretion of redeemable non-controlling interest

 

 

 

 
(6,729
)
 

 

 

 

 
(6,729
)
 

 

 

 

 
(6,729
)
Equity reallocation

 

 

 

 
8,963

 

 

 

 

 
8,963

 
(8,963
)
 

 

 
(8,963
)
 

Balance as of September 30, 2017
92,771

 
$
928

 
48,202

 
$
482

 
$
1,480,584

 
$
(285,330
)
 
$
57,334

 
(362
)
 
$
(5,381
)
 
$
1,248,617

 
$
1,769,006

 
$
(371,892
)
 
$
5,482

 
$
1,402,596

 
$
2,651,213

———
(1)
Excludes $18,162 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)


 
Nine Months Ended September 30,
2017
 
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(91,773
)
 
$
(106,153
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation, accretion and amortization expense
186,039

 
178,026

Amortization of favorable and unfavorable rate revenue contracts, net
29,459

 
30,128

Gain on sale of renewable energy facilities
(37,116
)
 

Impairment of renewable energy facilities
1,429

 

Amortization of deferred financing costs and debt discounts
19,729

 
19,579

Unrealized loss on U.K. interest rate swaps
2,425

 
35,840

Unrealized (gain) loss on commodity contract derivatives, net
(1,244
)
 
5,006

Recognition of deferred revenue
(11,510
)
 
(9,508
)
Stock-based compensation expense
7,049

 
3,857

Unrealized (gain) loss on foreign currency exchange, net
(5,275
)
 
6,349

Loss on extinguishment of debt
2,518

 

Loss on receivables - affiliate

 
845

Deferred taxes
5,166

 
3,014

Other, net
5,978

 
2,287

Changes in assets and liabilities:
 
 
 
Accounts receivable
(18,860
)
 
(30,502
)
Prepaid expenses and other current assets
(4,997
)
 
(11,827
)
Accounts payable, accrued expenses and other current liabilities
(758
)
 
10,035

Deferred revenue
199

 
2,457

Other, net
3,907

 
5,483

Net cash provided by operating activities
92,365

 
144,916

Cash flows from investing activities:
 
 
 
Capital expenditures
(7,472
)
 
(41,698
)
Proceeds from sale of renewable energy facilities, net of cash and restricted cash disposed
183,235

 

Proceeds from renewable energy state rebate
15,542

 

Proceeds from reimbursable interconnection costs
8,079

 

Acquisitions of renewable energy facilities from third parties, net of cash and restricted cash acquired

 
(4,064
)
Net cash provided by (used in) investing activities
$
199,384

 
$
(45,762
)

See accompanying notes to unaudited condensed consolidated financial statements.

8



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

 
Nine Months Ended September 30,
2017
 
2016
Cash flows from financing activities:
 
 
 
Borrowings of non-recourse long-term debt
$
79,835

 
$
3,980

Principal payments and prepayments on non-recourse long-term debt
(199,481
)
 
(122,597
)
Revolver repayments
(275,000
)
 

Sale of membership interests and contributions from non-controlling interests in renewable energy facilities
6,935

 
15,501

Distributions to non-controlling interests in renewable energy facilities
(23,017
)
 
(19,365
)
Net SunEdison investment
7,436

 
37,200

Due to SunEdison and affiliates, net
(3,097
)
 
(29,036
)
Debt financing fees
(10,228
)
 
(12,958
)
Other financing activities
(1,030
)
 

Net cash used in financing activities
(417,647
)
 
(127,275
)
Net decrease in cash, cash equivalents and restricted cash
(125,898
)
 
(28,121
)
Net change in cash, cash equivalents and restricted cash classified within assets held for sale
54,806

 
(54,731
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
3,264

 
(5,933
)
Cash, cash equivalents and restricted cash at beginning of period
682,837

 
793,033

Cash, cash equivalents and restricted cash at end of period
$
615,009

 
$
704,248

Supplemental Disclosures:
 
 
 
Cash paid for interest
$
182,021

 
$
183,577

Cash paid for income taxes

 


See accompanying notes to unaudited condensed consolidated financial statements.

9



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

As of September 30, 2017, TerraForm Power, Inc. ("TerraForm Power") and its subsidiaries (together with TerraForm Power, the "Company") was 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. As a result of the consummation of the Merger (as discussed and defined below) on October 16, 2017, a change of control of TerraForm Power occurred, and Orion US Holdings 1 L.P. ("Orion Holdings"), which is an affiliate of Brookfield Asset Management Inc. (“Brookfield”), now holds 51% of the voting securities of TerraForm Power. As a result of the Merger closing, TerraForm Power is no longer a controlled affiliate of SunEdison, Inc. and is now a controlled affiliate of Brookfield.
 
The Consummation of the Brookfield Sponsorship Transaction and of the Settlement with SunEdison

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"). In response to SunEdison’s financial and operating difficulties, the Company 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, and a process to settle claims with SunEdison. 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 Holdings and BRE TERP Holdings Inc. ("Merger Sub"), a wholly-owned subsidiary of Orion Holdings, which are affiliates of Brookfield. At the same time, the Company and SunEdison also entered into a settlement agreement (the “Settlement Agreement”) and a voting and support agreement (the “Voting and Support Agreement”), among other things, to facilitate the closing of the Merger and the settlement of claims between the Company and SunEdison.

On October 6, 2017, the Merger Agreement was approved by the holders of a majority of the outstanding Class A shares of TerraForm Power, 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) and 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 transaction. With these votes, all conditions to the merger transaction contemplated by the Merger Agreement were satisfied. On October 16, 2017, Merger Sub merged with and into TerraForm Power (the “Merger”), with TerraForm Power continuing as the surviving corporation in the Merger. Immediately following the consummation of the Merger, there were 148,224,429 Class A shares of TerraForm Power outstanding and Orion Holdings holds 51% of such shares. In addition, pursuant to the Merger Agreement, at or prior to the effective time of the Merger, the Company and Orion Holdings (or one of its affiliates), among other parties, entered into a suite of agreements providing for sponsorship arrangements, including a master services agreement, relationship agreement, governance agreement and a sponsor line of credit (the "Sponsorship Agreements"), as are more fully described in Note 15. Related Parties and Note 6. Long-term Debt.

Immediately prior to the effective time of the Merger, pursuant to the Settlement Agreement, SunEdison exchanged all of the Class B units held by SunEdison or any of its controlled affiliates in Terra LLC for 48,202,310 Class A shares of TerraForm Power, and as a result of such exchange, all shares of Class B common stock of TerraForm Power held by SunEdison or any of its controlled affiliates were automatically redeemed and retired. Pursuant to the Settlement Agreement, immediately following such exchange, the Company issued to SunEdison additional Class A shares such that immediately prior to the effective time of the Merger, SunEdison and certain of its affiliates held an aggregate number of Class A shares equal to 36.9% of the Company’s fully diluted share count. SunEdison and certain of its affiliates also transferred all of the outstanding incentive distribution rights (“IDRs”) of Terra LLC held by SunEdison or certain of its affiliates to BRE Delaware, Inc. (the "Brookfield IDR Holder") at the effective time of the Merger. Under the Settlement Agreement, upon the consummation of the Merger, all agreements between the Company and the SunEdison Debtors were deemed rejected, subject to certain limited exceptions, without further liability, claims or damages on the part of the Company. The settlements, mutual release and certain


10




other terms and conditions of the Settlement Agreement also became effective upon the consummation of the Merger. Refer to Note 15. Related Parties for further discussion.
    
Going Concern

In its Form 10-K for the year ended December 31, 2016 and its Forms 10-Q for each of the quarters ended March 31, 2017 and June 30, 2017, the Company disclosed there was substantial doubt about its ability to continue as a going concern. While the financial statements accompanying those filings and the accompanying unaudited condensed consolidated financial statements were prepared on a going concern basis, the matters disclosed in those filings raised substantial doubt about our ability to continue as a going concern as a result of the SunEdison Bankruptcy and the related impacts on the Company, including the Company’s historic reliance on SunEdison, defaults under project-level financing arrangements and the potential for creditors or other stakeholders of SunEdison to petition the court to substantively consolidate the Company’s assets and liabilities into the SunEdison bankruptcy estate.

Since the date of the SunEdison Bankruptcy, the Company has implemented significant measures to mitigate its impact on the Company. We no longer 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, management and administration services provided by or under the direction of SunEdison. Since the date of the SunEdison Bankruptcy, we have substantially reduced our reliance on SunEdison by transitioning the asset management, operations and maintenance of our renewable energy facilities in-house or to third parties, by hiring directly our own employees and contractors and by establishing our own information technology systems. While we continue to receive a limited scope of transition services from SunEdison, we are working to complete this transition and would be in a position to implement contingency plans or replace those services should the need arise. As a result, we believe we are in a position to operate the business of the Company on a stand-alone basis.
The Company experienced covenant defaults under most of our financing arrangements in 2016 and 2017, 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 and 2016. The Company has completed filing of 2015 and 2016 audited annual financial statements and all of its project-level audited financial statements for fiscal year 2016 as of the date hereof. The Company is working to obtain waivers for late delivery of project-level audited financial statements that were delivered after the grace period expired. In addition, in a number of cases the SunEdison Bankruptcy resulted in defaults because SunEdison Debtors were serving as operations and maintenance ("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 primarily through the retention of replacement service providers. The amount of restricted cash associated with the aforementioned defaults that cannot be distributed from the projects as of the date of the issuance of these financial statements is $23 million and is not needed for the Company to meet its cash flow needs. We expect to obtain waivers for these defaults before the end of the year and do not expect these defaults to affect our ability to meet our liquidity requirements and meet corporate credit facility covenants.
Finally, during the course of the SunEdison Bankruptcy there was 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. In March of 2017, the Company entered into the Settlement Agreement and the Voting and Support Agreement with the SunEdison Debtors, both of which have been approved by the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). Mutual releases between the Company and the SunEdison Debtors have now become effective, and as a result, the vast majority of contracts between the Company and SunEdison Debtors have been terminated. In addition, SunEdison received additional shares in the Company in connection with the consummation of the sponsorship transaction with Brookfield. SunEdison’s plan of reorganization has been confirmed by the Bankruptcy Court and includes the closing of the sponsorship transaction with Brookfield as a critical part of its emergence strategy. Because of these developments, we believe it is now a remote possibility that the Bankruptcy Court would order substantive consolidation of the Company with the SunEdison Debtors.

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


11




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 September 30, 2017, the results of operations and comprehensive (loss) income for the three and nine months ended September 30, 2017 and 2016 and cash flows for the nine months ended September 30, 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 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.



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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 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. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted and the adoption of ASU No. 2016-18 will be applied retrospectively. The Company elected to early adopt ASU No. 2016-18 during the second quarter of 2017 and has revised its unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2016. Net cash used in investing activities for


13




the nine months ended September 30, 2016 decreased by $57.7 million as a result of the adoption of this standard. The sum of the Company's cash and cash equivalents of $565.3 million, current portion of restricted cash of $114.9 million and non-current portion of restricted cash of $2.6 million reported within the unaudited condensed consolidated balance sheet as of December 31, 2016 equals the beginning balance of cash, cash equivalents and restricted cash of $682.8 million shown in the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2017. The sum of the Company's cash and cash equivalents of $462.8 million, current portion of restricted cash of $126.1 million and non-current portion of restricted cash of $26.1 million reported within the unaudited condensed consolidated balance sheet as of September 30, 2017 equals the ending balance of cash, cash equivalents and restricted cash of $615.0 million shown in the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2017. The Company had $54.7 million of restricted cash classified within assets held for sale as of September 30, 2016 (with no comparable amount as of December 31, 2015) and thus had to add this reclassification amount to the net change in cash, cash equivalents and restricted cash classified within assets held for sale line reported in the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2016 to reconcile the change in the beginning and end-of-period cash, cash equivalents and restricted cash. The Company's restricted cash balances during 2016 also included amounts related to its renewable energy facilities located in the United Kingdom (the "U.K.") and Canada, which resulted in a $5.3 million change in the effect of exchange rate changes on cash, cash equivalents and restricted cash line reported in the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2016.

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


14




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 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.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU amends the hedge accounting model to enable entities to better portray the economics of their risk management activities in the financial statements and simplifies the application of hedge accounting in certain situations. ASU No. 2017-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect of this standard on its 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 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 December 31, 2016 (refer to the table below) and measured each at the lower of carrying value or fair value less cost to sell. As discussed below, the Company closed on the sale of these facilities in the second quarter of 2017. 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.

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 $214.1 million of proceeds from the sale, which was net of transaction expenses of $3.9 million and distributions taken from the U.K. Portfolio after announcement and before closing of the sale. The Company also disposed of $14.8 million of cash and cash equivalents and $21.8 million of restricted cash as a result of the sale. The proceeds were 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 recognized a gain on the sale of $37.1 million in the second quarter of 2017 which is reflected within gain on sale of renewable energy facilities in the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2017. The Company has retained 11.1 MW of solar assets in the U.K., which are not held for sale.

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


15




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 within cost of operations 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 proceeds of $1.1 million in the beginning of the second quarter of 2017. The Company also disposed of $0.8 million of restricted cash as a result of the sale. There was no additional loss recognized during 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, 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 proceeds of $6.0 million in the third quarter of 2017. The Company also disposed of $0.6 million of cash and cash equivalents in the second quarter of 2017 as a result of the sale. There was no additional loss recognized during 2017 as a result of this sale.

The Company sold its remaining 0.3 MW of residential assets (that were not classified as held for sale as of December 31, 2016) during the third quarter of 2017. These assets did not meet the criteria for held for sale classification in the second quarter of 2017 but the Company determined that certain impairment indicators were present and as a result recognized an impairment charge of $1.4 million during the second quarter which is reflected within impairment of renewable energy facilities in the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2017. There was no additional loss recognized during the third quarter as a result of the sale.



16




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 sheet as of December 31, 2016. As discussed above, the Company closed on the sale of these renewable energy facilities in the first half of 2017.
 
 
As of December 31, 2016
(In thousands)
 
U.K. Portfolio
 
Residential Portfolio
 
Total
Assets held for sale:
 
 
 
 
 
 
Restricted cash
 
$
53,604

 
$
1,202

 
$
54,806

Accounts receivable, net
 
4,952

 
300

 
5,252

Prepaid expenses and other current assets
 
1,295

 
170

 
1,465

Total current assets held for sale
 
59,851


1,672


61,523

 
 
 
 
 
 
 
Renewable energy facilities, net
 
529,154

 
19,534

 
548,688

Intangible assets, net
 
1,480

 

 
1,480

Other assets
 
2,103

 

 
2,103

Total non-current assets held for sale
 
532,737


19,534


552,271

 
 
 
 
 
 
 
Total assets held for sale
 
$
592,588

 
$
21,206

 
$
613,794

 
 
 
 
 
 
 
Liabilities related to assets held for sale:
 
 
 
 
 
 
Current portion of long-term debt
 
$
14,510

 
$
175

 
$
14,685

Accounts payable, accrued expenses and other current liabilities
 
5,980

 
245

 
6,225

Deferred revenue
 

 
10

 
10

Due to SunEdison and affiliates, net
 
692

 
186

 
878

Total current liabilities related to assets held for sale
 
21,182


616


21,798

 
 
 
 
 
 
 
Long-term debt, less current portion
 
349,687

 
4,190

 
353,877

Deferred revenue, less current portion
 

 
246

 
246

Asset retirement obligations
 
39,563

 
287

 
39,850

Other long-term liabilities
 
16,786

 

 
16,786

Total non-current liabilities related to assets held for sale
 
406,036


4,723


410,759

 
 
 
 
 
 
 
Total liabilities related to assets held for sale
 
$
427,218

 
$
5,339

 
$
432,557


3. RENEWABLE ENERGY FACILITIES

Renewable energy facilities, net consists of the following: 
(In thousands)
 
September 30,
2017
 
December 31,
2016
Renewable energy facilities in service, at cost
 
$
5,379,726

 
$
5,354,883

Less accumulated depreciation - renewable energy facilities
 
(526,213
)
 
(364,756
)
Renewable energy facilities in service, net
 
4,853,513

 
4,990,127

Construction in progress - renewable energy facilities
 
790

 
3,124

Total renewable energy facilities, net
 
$
4,854,303

 
$
4,993,251


Depreciation expense related to renewable energy facilities was $53.4 million and $160.0 million for the three and nine months ended September 30, 2017, respectively, as compared to $48.1 million and $148.5 million for the same periods in the prior year.



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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 December 31, 2016, the Company reclassified $548.7 million from renewable energy facilities, net to non-current assets held for sale in the unaudited condensed consolidated balance sheet. There was no similar reclassification as of September 30, 2017 as the sale of these renewable energy facilities closed in the first half of 2017 (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 September 30, 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
 
$
720,109

 
$
(92,139
)
 
$
627,970

In-place value of market rate revenue contracts
 
19 years
 
521,798

 
(67,022
)
 
454,776

Favorable rate land leases
 
17 years
 
15,800

 
(2,130
)
 
13,670

Total intangible assets, net
 
 
 
$
1,257,707

 
$
(161,291
)
 
$
1,096,416

 
 
 
 
 
 
 
 
 
Unfavorable rate revenue contracts
 
7 years
 
$
35,086

 
$
(14,744
)
 
$
20,342

Unfavorable rate O&M contracts
 
2 years
 
5,000

 
(2,240
)
 
2,760

Unfavorable rate land lease
 
15 years
 
1,000

 
(148
)
 
852

Total intangible liabilities, net
 
 
 
$
41,086

 
$
(17,132
)
 
$
23,954

    
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 27 years as of September 30, 2017.



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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 and nine months ended September 30, 2017, net amortization expense related to favorable and unfavorable rate revenue contracts resulted in a reduction of operating revenues, net of $10.0 million and $29.5 million, respectively, as compared to a $9.8 million and $30.1 million reduction of operating revenues, net for the same periods in the prior year.

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 and nine months ended September 30, 2017, amortization expense related to the in-place value of market rate revenue contracts was $6.4 million and $19.4 million, respectively, as compared to $7.0 million and $20.8 million for the same periods in the prior year.

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 and nine months ended September 30, 2017, net amortization related to favorable and unfavorable rate land leases and unfavorable rate O&M contracts resulted in a reduction of cost of operations of $0.1 million and $0.4 million, respectively, as compared to a $0.2 million and $0.6 million increase to cost of operations for the same periods in the prior year.

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. As a result of the Company's sale of TerraForm Resi Solar Manager, LLC, a subsidiary of the Company that owned and operated 8.9 MW of residential rooftop solar installations, during the second quarter of 2017, the related assets and liabilities of this variable interest entity were deconsolidated (see Note 2. Assets Held for Sale). No other VIEs were deconsolidated during the nine months ended September 30, 2017 and 2016.

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)
 
September 30,
2017
 
December 31,
2016
Current assets
 
$
172,183

 
$
191,244

Non-current assets
 
4,222,425

 
4,351,635

Total assets
 
$
4,394,608

 
$
4,542,879

Current liabilities
 
$
202,451

 
$
638,452

Non-current liabilities
 
930,187

 
514,464

Total liabilities
 
$
1,132,638

 
$
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.

As a result of the consummation of the Merger and change of control of TerraForm Power that occurred on October 16, 2017 as discussed in Note 1. Nature of Operations and Basis of Presentation, the Company will perform an updated consolidation assessment in the fourth quarter of 2017.



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6. LONG-TERM DEBT
    
Long-term debt consists of the following: 
(In thousands, except rates)
 
September 30,
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
 
277,000

 
552,000

 
Variable
 
4.02
 
Revolving loan
Non-recourse long-term debt3:
 
 
 
 
 
 
 
 
 
 
Permanent financing
 
1,986,317

 
2,078,009

 
Blended4
 
5.895
 
Term debt / Senior notes
Financing lease obligations
 
118,194

 
123,930

 
Imputed
 
5.625
 
Financing lease obligations
Total principal due for long-term debt and financing lease obligations
 
3,631,511

 
4,003,939

 
 
 
5.935
 
 
Unamortized discount, net
 
(15,105
)
 
(13,620
)
 
 
 
 
 
 
Deferred financing costs, net
 
(35,012
)
 
(39,405
)
 
 
 
 
 
 
Less current portion of long-term debt and financing lease obligations6
 
(716,728
)
 
(2,212,968
)
 
 
 
 
 
 
Long-term debt and financing lease obligations, less current portion7
 
$
2,864,666

 
$
1,737,946

 
 
 
 
 
 
———
(1)
As of September 30, 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 certain 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 September 30, 2017, 50% of this balance had a variable interest rate and the other 50% 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 September 30, 2017.
(6)
As of 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 sheet. There was no similar reclassification as of September 30, 2017 as the sale of the related renewable energy facilities closed in the first half of 2017 (see Note 2. Assets Held for Sale).
(7)
As of 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 sheet. There was no similar reclassification as of September 30, 2017 as the sale of the related renewable energy facilities closed in the first half of 2017 (see Note 2. Assets Held for Sale).

Corporate-level Long-term Debt

Revolver

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 and April 26, 2017, Terra Operating LLC entered into a tenth amendment and an eleventh amendment, respectively, to the terms of the Revolver, which collectively provided that the date on which the Company must deliver to the Administrative Agent and other parties to the Revolver its annual financial


20




statements and accompanying audit report with respect to fiscal year 2016 would be extended 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. The Company recognized a $0.6 million charge during the nine months ended September 30, 2017 as a result of this reduction in borrowing capacity for the Revolver and corresponding write-off of a portion of the unamortized deferred financing costs, which is reflected within interest expense, net in the unaudited condensed consolidated statement of operations.

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 its Form 10-Q for the first quarter of 2017 prior to August 30, 2017 and filed its Form 10-Q for the second quarter of 2017 prior to September 30, 2017, and consequently no event of default occurred under the Revolver with respect to financial statement delivery for the first and second quarter of 2017. As discussed below, the Company terminated the Revolver prior to the due date for the third quarter financial statements.

Per the terms of the twelfth amendment, Terra Operating LLC agreed to permanently reduce the revolving commitments under the Revolver by $50.0 million. The Company recognized a $0.5 million charge during the three and nine months ended September 30, 2017 as a result of this reduction in borrowing capacity for the Revolver and corresponding write-off of a portion of the unamortized deferred financing costs, which is reflected within interest expense, net in the unaudited condensed consolidated statements of operations. As of September 30, 2017, the total borrowing capacity under the Revolver was $520.0 million. There was no additional payment of principal on the Revolver made in connection with this commitment reduction.

On September 27, 2017, Terra Operating LLC repaid an additional $70.0 million of Revolver indebtedness, reducing the amount of revolving loans outstanding to $277.0 million. There was no reduction in revolving commitments and borrowing capacity as a result of this repayment.

On October 17, 2017, concurrently with its entry into the New Revolver (as defined and described below), Terra Operating LLC terminated the Revolver and repaid the outstanding loan amount of $277.0 million, using $27.0 million of cash on hand and $250.0 million of borrowings drawn under the New Revolver. There were no prepayment penalties incurred in connection with the termination of the Revolver.


21





New Revolver    

On October 17, 2017, Terra Operating LLC entered into a new senior secured revolving credit facility (the “New Revolver”). The New Revolver consists of a revolving credit facility in an initial amount of $450.0 million (available for revolving loans and letters of credit). The New Revolver matures on the four-year anniversary of the closing date of such facility. Each of Terra Operating LLC’s existing and subsequently acquired or organized domestic restricted subsidiaries (excluding non-recourse subsidiaries) and Terra LLC are or will become guarantors under the New Revolver. $250.0 million of revolving loans were initially drawn and used to repay a portion of the outstanding borrowings under the existing Revolver as discussed above.

All outstanding amounts under the New Revolver will bear interest at a rate per annum equal to, at Terra Operating LLC’s option, either (i) a base rate plus a margin ranging between 1.25% to 2.00% or (ii) a reserve adjusted Eurodollar rate plus a margin ranging between 2.25% to 3.00%. In addition to paying interest on outstanding principal under the New Revolver, the Company will be required to pay a standby fee in respect of the unutilized commitments thereunder, payable quarterly in arrears. This standby fee will range between 0.375% and 0.50% per annum. The New Revolver provides for voluntary prepayments, in whole or in part, subject to notice periods. There are no prepayment penalties or premiums other than customary breakage costs.

The New Revolver contains customary affirmative covenants and negative covenants, subject to exceptions, by Terra LLC, Terra Operating LLC and certain of Terra Operating LLC’s subsidiaries, including covenants related to financial statements and other reports (including notices of default) and a maximum leverage ratio that will be tested quarterly.

Pursuant to the terms of the New Revolver, a default of more than $75.0 million of indebtedness (other than non-recourse indebtedness, and indebtedness under the Sponsor Line Agreement (as defined and discussed below) as it is an obligation of TerraForm Power), including 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"), would result in a cross-default under the New Revolver that would permit the lenders holding more than 50% of the aggregate exposure under the New Revolver to accelerate any outstanding principal amount of loans, terminate any outstanding letter of credit and terminate the outstanding commitments under the New Revolver.

The New Revolver, each guarantee and any interest rate, currency hedging or hedging of REC obligations of Terra Operating LLC or any guarantor owed to the administrative agent, any arranger or any lender under the New Revolver is secured by first priority security interests in (i) all of Terra Operating LLC’s, each guarantor’s and certain unencumbered non-recourse subsidiaries’ assets, (ii) 100% of the capital stock of each of Terra Operating LLC and its domestic restricted subsidiaries and 65% of the capital stock of Terra Operating LLC’s foreign restricted subsidiaries and (iii) all intercompany debt. Notwithstanding the foregoing, collateral under the New Revolver excludes the capital stock of non-recourse subsidiaries. As of November 8, 2017, the New Revolver is secured equally and ratably with the Company's new senior secured term loan described below.

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 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, the Company's Form 10-


22




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 the Form 10-Q for the first quarter of 2017. The Company filed its Form 10-Q for the second quarter of 2017 and this Form 10-Q for the third quarter of 2017 prior to the initial respective deadline under the 2023 Indenture and the 2025 Indenture.

The closing of the Merger would 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. 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 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. The payment of this additional $1.5 million fee to the lenders was accounted for as a debt modification and capitalized as an additional debt discount, which will be amortized proportionately over the respective maturities of the Senior Notes as part of the new effective yield.

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. As a result, on October 16, 2017, Terra Operating LLC entered into a sixth supplemental indenture to the 2023 Indenture and a fifth supplemental indenture to the 2025 Indenture that amended 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)." Upon the closing of the Merger, Terra Operating LLC was also obligated to 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.

Pursuant to the terms of the 2023 Indenture and the 2025 Indenture, a default of more than $75.0 million of indebtedness (other than non-recourse indebtedness and indebtedness under the Sponsor Line Agreement (as defined and discussed below) as it is an obligation of TerraForm Power), including under the New Revolver, that is (i) caused by a failure to pay principal of, or interest or premium, if any, on such indebtedness prior to the expiration of the grace period provided in such indebtedness on the date of such default or (ii) results in the acceleration of such indebtedness would give the trustee under the respective Indentures or the holders of at least 25% in the aggregate principal amount of the then outstanding senior notes under the respective Indentures the right to accelerate any outstanding principal amount of loans, terminate any outstanding letter of credit and terminate the outstanding commitments under the respective Indentures.

Sponsor Line Agreement

On October 16, 2017, TerraForm Power entered into a credit agreement (the “Sponsor Line Agreement”) with Brookfield and one of its affiliates. The Sponsor Line Agreement establishes a $500.0 million secured revolving credit facility and provides for the lenders to commit to make LIBOR loans to the Company during a period not to exceed three years from the effective date of the Sponsor Line Agreement (subject to acceleration for certain specified events). The Company may only use the revolving credit facility to fund all or a portion of certain funded acquisitions or growth capital expenditures. The Sponsor Line Agreement will terminate, and all obligations thereunder will become payable, no later than October 16, 2022.

Borrowings under the Sponsor Line Agreement will bear interest at a rate per annum equal to a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus 3.00% per annum. In addition to paying interest on outstanding principal under the Sponsor Line Agreement, the Company will be required to pay a standby fee of 0.50% per annum in respect of the unutilized commitments thereunder, payable quarterly in arrears.

TerraForm Power will be permitted to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans under the Sponsor Line Agreement at any time without premium or penalty, other than customary “breakage” costs. TerraForm Power’s obligations under the Sponsor Line Agreement are secured by first-priority security interests in substantially all assets of TerraForm Power, including 100% of the capital stock of Terra LLC, in each case subject to certain exclusions set forth in the credit documentation governing the Sponsor Line Agreement.


23





The Sponsor Line Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict TerraForm Power’s ability to enter into swap contracts, sell or otherwise dispose of all or substantially all its assets or to engage in certain businesses. The Sponsor Line Agreement also contains certain customary affirmative covenants and events of default. If an event of default, as specified in the Sponsor Line Agreement, shall occur and be continuing, the Company may be required to repay all amounts outstanding under the Sponsor Line Agreement. An event of default under the New Revolver, 2023 Indenture or 2025 Indenture would trigger an event of default under the Sponsor Line Agreement.

Senior Secured Term Loan

On November 8, 2017, Terra Operating LLC entered into a 5-year $350.0 million senior secured term loan, which was primarily used to repay outstanding borrowings under the non-recourse portfolio term loan discussed under the Non-recourse Portfolio Term Loan Prepayments section below, prior to the date a change of control default would have occurred. This term loan bears interest at a rate per annum equal to LIBOR plus a margin of 2.75% and is secured equally and ratably with the New Revolver.

Non-recourse Long-term Debt

Indirect subsidiaries of the Company have incurred long-term non-recourse 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 TerraForm Power, 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 New Revolver, the Senior Notes due 2023, the Senior Notes due 2025 and the Sponsor Line Agreement.

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 59 MW 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 were used for general corporate purposes and to pay down an additional $5.0 million on the Revolver as described above.

Non-recourse Portfolio Term Loan Prepayments

The Company had a non-recourse portfolio term loan that was 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 was to mature in January 15, 2019 to the extent the Company exercised 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. On September 27, 2017, the Company made an additional $30.0 million prepayment for this loan. The Company recognized a $1.4 million charge during the nine months ended September 30, 2017 as a result of these prepayments and corresponding write-off of a proportionate amount of the unamortized debt discount and deferred financing costs, which is reflected within interest expense, net in the unaudited condensed consolidated statement of operations. This term loan had an outstanding principal balance of $337.9 million as of September 30, 2017.


24





In October of 2017, the Company made $37.6 million of additional prepayments. On November 8, 2017, the Company repaid the remaining principal balance using borrowings from the $350.0 million senior secured term loan that Terra Operating LLC entered into on November 8, 2017 as discussed in the Senior Secured Term Loan section above.

Non-recourse Debt Defaults

Historically, a SunEdison Debtor was 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 substantially transitioned 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 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 has completed all project-level audits for fiscal year 2016 as of the date hereof. The Company has also substantially delivered all outstanding project-level quarterly reporting deliverables for 2017 and is working to complete the remaining deliverables and seeking to obtain waivers for late delivery of project-level financial statements that were delivered after the grace period expired.

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. 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 these defaults. As these defaults occurred prior to the issuance of the financial statements for the nine months ended September 30, 2017 and for the year ended December 31, 2016, $545.2 million and $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 September 30, 2017 and December 31, 2016, respectively, 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 based on (i) its past history of obtaining waivers and/or forbearance agreements with lenders, (ii) the nature and existence of active negotiations between the Company and the respective lenders to secure a waiver, (iii) ongoing efforts to provide quarterly financial statement deliverables to cure certain of the defaults, (iv) the Company's timely servicing of these debt instruments and (v) as no non-recourse financing has been accelerated to date and no project-level lender has notified the Company of such lenders election to enforce project security interests.

As a result of these defaults, the Company also reclassified $51.2 million and $65.3 million of long-term restricted cash to current as of September 30, 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 September 30, 2017 and December 31, 2016, $60.0 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 September 30, 2017 reclassification amount as the sale of the related renewable energy facilities closed in the first half of 2017. Refer to Note 8. Derivatives for discussion of corresponding interest rate swap reclassifications to current as a result of these defaults.



25




Maturities

The aggregate contractual payments of long-term debt due after September 30, 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
 
20212
 
Thereafter
 
Total
Maturities of long-term debt as of September 30, 20173
$
99,146

 
$
111,620

 
$
391,330

 
$
101,867

 
$
355,118

 
$
2,572,430

 
$
3,631,511

———
(1)
Includes $27.0 million of Revolver indebtedness that was repaid with cash on hand in the fourth quarter of 2017 as discussed above. Also includes $37.6 million of prepayments made in the fourth quarter of 2017 for the Company's non-recourse portfolio term loan as discussed above under Non-recourse Portfolio Term Loan Prepayments.
(2)
Includes $250.0 million of Revolver indebtedness, which was refinanced with the New Revolver in the fourth quarter of 2017 as discussed above. Management does not intend to repay these borrowings within a year from the balance sheet date with the use of working capital and the New Revolver does not mature until 2021.
(3)
Represents the contractual principal payment due dates for the Company's long-term debt and does not reflect the reclassification of $545.2 million of long-term debt to current as a result of debt defaults under certain of the Company's non-recourse financing arrangements.

7. INCOME TAXES

The income tax provision consisted of the following:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except effective tax rate)
 
2017
 
2016
 
2017
 
2016
Loss before income tax (benefit) expense
 
$
(37,453
)
 
$
(26,571
)
 
$
(96,755
)
 
$
(103,038
)
Income tax (benefit) expense
 
(2,633
)
 
1,140

 
(4,982
)
 
3,115

Effective tax rate
 
7.0
%
 
(4.3
)%
 
5.1
%
 
(3.0
)%

As of September 30, 2017, TerraForm Power owned 65.8% of Terra LLC and consolidated the results of Terra LLC through its controlling interest. The Company recorded SunEdison's 34.2% 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 recorded income tax on its 65.8% of Terra LLC's taxable income and SunEdison recorded income tax on its 34.2% share of Terra LLC's taxable income.

For the three and nine months ended September 30, 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 September 30, 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 September 30, 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.


26





As of September 30, 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 September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
$

 
$
11,191

 
$

 
$
82

 
$
13,765

 
$
25,038

 
$
(82
)
 
$
24,956

Other assets
 
3,611

 
86,517

 

 

 
19,305

 
109,433

 

 
109,433

Total assets
 
$
3,611

 
$
97,708

 
$

 
$
82

 
$
33,070

 
$
134,471

 
$
(82
)
 
$
134,389

Accounts payable, accrued expenses and other current liabilities
 
$
9,049

 
$

 
$
242

 
$
110

 
$

 
$
9,401

 
$
(82
)
 
$
9,319

Other long-term liabilities
 
129

 

 
489

 

 

 
618

 

 
618

Total liabilities
 
$
9,178

 
$

 
$
731

 
$
110

 
$

 
$
10,019

 
$
(82
)
 
$
9,937

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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




27




As of September 30, 2017 and December 31, 2016, notional amounts for derivative instruments consisted of the following:
 
 
Notional Amount as of
(In thousands)
 
September 30, 2017
 
December 31, 2016
Derivatives designated as hedges:
 
 
 
 
Interest rate swaps (USD)
 
405,183

 
433,874

Interest rate swaps (CAD)
 
156,713

 
84,713

Commodity contracts (MWhs)
 
15,941

 
16,988

Derivatives not designated as hedges:
 
 
 
 
Interest rate swaps (USD)
 
13,788

 
14,681

Interest rate swaps (GBP)
 

 
222,018

Foreign currency contracts (CAD)
 
15,175

 
25,075

Commodity contracts (MWhs)
 
1,117

 
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 September 30, 2017 as each of the commodity contracts were in a gain position.

Gains and losses on derivatives not designated as hedges for the three and nine months ended September 30, 2017 and 2016 consisted of the following:
 
 
Location of Loss (Gain) in the Statements of Operations
 
Three Months Ended September 30,
Nine Months Ended September 30,
(In thousands)
2017
 
2016
 
2017
 
2016
Interest rate swaps
 
Interest expense, net
 
$
27

 
$
5,127

 
$
3,219

 
$
36,583

Foreign currency contracts
 
Loss on foreign currency exchange, net
 
457

 
(73
)
 
1,017

 
(905
)
Commodity contracts
 
Operating revenues, net
 
(1,371
)
 
(3,095
)
 
(7,062
)
 
(11,009
)
    
During the second quarter of 2016, the Company discontinued hedge accounting for interest rate swaps that were previously designated as cash flow hedges of the forecasted interest payments pertaining to variable rate project debt in the U.K. Portfolio. Hedge accounting was prospectively discontinued for interest payments occurring before the anticipated sale date of June 2017, and for periods beyond that, the amounts accumulated in other comprehensive income were fully reclassified into earnings during the second quarter of 2016. As discussed in Note 2. Assets Held for Sale, the Company consummated the sale of the U.K. Portfolio on May 11, 2017. As part of the sale agreement, Vortex Solar UK Limited assumed the debt and the associated interest rate swaps. As of the date of the sale, the remaining amount accumulated in other comprehensive income of $0.4 million was reclassified into earnings and the fair value liability of the interest rate swaps of $23.4 million is reflected in the unaudited condensed consolidated statements of operations within gain on sale of renewable energy facilities for the nine months ended September 30, 2017. As the sale occurred prior to the third quarter of 2017, there was no interest expense related to these interest rate swaps for the three months ended September 30, 2017. The interest expense amounts reflected in the table above for the other periods presented primarily pertains to these interest rate swaps.


28




Gains and losses recognized related to interest rate swaps and commodity contracts designated as cash flow hedges for the three and nine months ended September 30, 2017 and 2016 consisted of the following:
 
 
Three Months Ended September 30,
 
 
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)2
 
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
 
$
1,353

 
$
798

 
Interest expense, net
 
$
519

 
$
3,114

 
$
(315
)