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EX-32 - EXHIBIT 32 - TerraForm Power, Inc.terraform-33118xexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - TerraForm Power, Inc.terraform-33118xexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - TerraForm Power, Inc.terraform-33118xexhibit311.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________________________________________
FORM 10-Q
 _____________________________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
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
 ______________________________________________________________
image0a20.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 April 30, 2018, there were 148,086,027 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.
 





CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. These statements involve estimates, expectations, projections, goals, assumptions, known and unknown risks, and uncertainties and typically include words or variations of words such as “expect,” “anticipate,” “believe,” “intend,” “plan,” “seek,” “estimate,” “predict,” “project,” “goal,” “guidance,” “outlook,” “objective,” “forecast,” “target,” “potential,” “continue,” “would,” “will,” “should,” “could,” or “may” or other comparable terms and phrases. All statements that address operating performance, events, or developments that the Company expects or anticipates will occur in the future are forward-looking statements. They may include estimates of expected cash available for distribution, earnings, revenues, capital expenditures, liquidity, capital structure, future growth, financing arrangements and other financial performance items (including future dividends per share), descriptions of management’s plans or objectives for future operations, products, or services, or descriptions of assumptions underlying any of the above. Forward-looking statements provide the Company’s current expectations or predictions of future conditions, events, or results and speak only as of the date they are made. Although the Company believes its expectations and assumptions are reasonable, it can give no assurance that these expectations and assumptions will prove to have been correct and actual results may vary materially.

Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are listed below and further disclosed under the section entitled Item 1A. Risk Factors:

risks related to the transition to Brookfield Asset Management Inc. sponsorship, including our ability to realize the expected benefits of the sponsorship;
risks related to wind conditions at our wind assets or to weather conditions at our solar assets;
risks related to the effectiveness of our internal controls over financial reporting;
pending and future litigation;
the willingness and ability of counterparties to fulfill their obligations under offtake agreements;
price fluctuations, termination provisions and buyout provisions in offtake agreements;
our ability to enter into contracts to sell power on acceptable prices and terms, including as our offtake agreements expire;
our ability to compete against traditional and renewable energy companies;
government regulation, including compliance with regulatory and permit requirements and changes in tax laws, market rules, rates, tariffs, environmental laws and policies affecting renewable energy;
risks related to the expected relocation of the Company’s headquarters;
the condition of the debt and equity capital markets and our ability to borrow additional funds and access capital markets, as well as our substantial indebtedness and the possibility that we may incur additional indebtedness in the future;
operating and financial restrictions placed on us and our subsidiaries related to agreements governing indebtedness;
risks related to the expected timing and likelihood of completion of the tender offer for the shares of Saeta Yield, S.A.;
risks related to our financing of the tender offer for the shares of Saeta Yield, S.A., including our ability to issue equity on terms that are accretive to our shareholders and our ability to implement our permanent funding plan;
our ability to successfully identify, evaluate and consummate acquisitions; and
our ability to integrate the projects we acquire from third parties, including Saeta Yield, S.A., or otherwise and our ability to realize the anticipated benefits from such acquisitions.

The Company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions, factors, or expectations, new information, data, or methods, future events, or other changes, except as required by law. The foregoing list of factors that might cause results to differ materially from those contemplated in the forward-looking statements should be considered in connection with information regarding risks and uncertainties, which are described in this Quarterly Report on Form 10-Q, as well as additional factors we may describe from time to time in other filings with the Securities and Exchange Commission (the “SEC”). We operate in a competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and you should understand that it is not possible to predict or identify all such factors and, consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.





PART I - Financial Information

Item 1. Financial Statements.

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


 
Three Months Ended March 31,
 
2018
 
2017
Operating revenues, net
$
127,547

 
$
151,135

Operating costs and expenses:
 
 
 
Cost of operations
37,323

 
34,338

Cost of operations - affiliate

 
5,598

General and administrative expenses
24,284

 
36,725

General and administrative expenses - affiliate
3,474

 
1,419

Acquisition and related costs
3,685

 

Impairment of renewable energy facilities
15,240

 

Depreciation, accretion and amortization expense
65,590

 
60,987

Total operating costs and expenses
149,596

 
139,067

Operating (loss) income
(22,049
)
 
12,068

Other expenses:
 
 
 
Interest expense, net
53,554

 
68,312

Loss on foreign currency exchange, net
891

 
587

Other expenses, net
849

 
360

Total other expenses, net
55,294

 
69,259

Loss before income tax benefit
(77,343
)
 
(57,191
)
Income tax benefit
(976
)
 
(918
)
Net loss
(76,367
)
 
(56,273
)
Less: Net (loss) income attributable to redeemable non-controlling interests
(2,513
)
 
835

Less: Net loss attributable to non-controlling interests
(157,087
)
 
(25,339
)
Net income (loss) attributable to Class A common stockholders
$
83,233

 
$
(31,769
)
 
 
 
 
Weighted average number of shares:
 
 
 
Class A common stock - Basic
148,139

 
92,072

Class A common stock - Diluted
148,166

 
92,072

 
 
 
 
Earnings (loss) per share:
 
 
 
Class A common stock - Basic and diluted
$
0.56

 
$
(0.37
)
 
 
 
 
Dividends declared per share:
 
 
 
Class A common stock
$
0.19

 
$



See accompanying notes to unaudited condensed consolidated financial statements.

4



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



 
Three Months Ended March 31,
 
2018
 
2017
Net loss
$
(76,367
)
 
$
(56,273
)
Other comprehensive (loss) income, net of tax:
 
 
 
Foreign currency translation adjustments:
 
 
 
Net unrealized (loss) gain arising during the period
(3,283
)
 
2,680

Hedging activities:
 
 
 
Net unrealized (loss) gain arising during the period
(10,492
)
 
14,054

Reclassification of net realized gain into earnings
(962
)
 
(386
)
Other comprehensive (loss) income, net of tax
(14,737
)
 
16,348

Total comprehensive loss
(91,104
)
 
(39,925
)
Less: comprehensive (loss) income attributable to non-controlling interests:
 
 
 
Net (loss) income attributable to redeemable non-controlling interests
(2,513
)
 
835

Net loss attributable to non-controlling interests
(157,087
)
 
(25,339
)
Foreign currency translation adjustments

 
918

Hedging activities
(1,243
)
 
5,972

Comprehensive loss attributable to non-controlling interests
(160,843
)
 
(17,614
)
Comprehensive income (loss) attributable to Class A common stockholders
$
69,739

 
$
(22,311
)


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)


 
March 31, 2018
 
December 31, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
157,833

 
$
128,087

Restricted cash
47,035

 
54,006

Accounts receivable, net
70,346

 
89,680

Prepaid expenses and other current assets
43,473

 
65,393

Due from affiliates
4,856

 
4,370

Total current assets
323,543

 
341,536

 
 
 
 
Renewable energy facilities, net, including consolidated variable interest entities of $3,238,105 and $3,273,848 in 2018 and 2017, respectively
4,719,808

 
4,801,925

Intangible assets, net, including consolidated variable interest entities of $810,724 and $823,629 in 2018 and 2017, respectively
1,057,557

 
1,077,786

Restricted cash
48,529

 
42,694

Other assets
109,344

 
123,080

Total assets
$
6,258,781

 
$
6,387,021

 
 
 
 
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 $58,971 and $84,691 in 2018 and 2017, respectively
$
391,656

 
$
403,488

Accounts payable, accrued expenses and other current liabilities, including consolidated variable interest entities of $40,109 and $34,199 in 2018 and 2017, respectively
107,439

 
88,538

Deferred revenue
1,807

 
17,859

Due to affiliates
3,369

 
3,968

Total current liabilities
504,271

 
513,853

 
 
 
 
Long-term debt and financing lease obligations, less current portion, including consolidated variable interest entities of $852,667 and $833,388 in 2018 and 2017, respectively
3,202,715

 
3,195,312

Deferred revenue, less current portion
13,134

 
38,074

Deferred income taxes
16,839

 
18,636

Asset retirement obligations, including consolidated variable interest entities of $98,812 and $97,467 in 2018 and 2017, respectively
153,557

 
154,515

Other long-term liabilities
38,155

 
37,923

Total liabilities
3,928,671

 
3,958,313

 
 
 
 
Redeemable non-controlling interests
50,760

 
58,340

Stockholders' equity:
 
 
 
Class A common stock, $0.01 par value per share, 1,200,000,000 shares authorized, 148,586,447 shares issued and 148,086,027 shares outstanding in 2018 and 2017
1,486

 
1,486

Additional paid-in capital
1,841,692

 
1,866,206

Accumulated deficit
(290,818
)
 
(398,629
)
Accumulated other comprehensive income
30,360

 
48,018

Treasury stock, 500,420 shares in 2018 and 2017
(6,712
)
 
(6,712
)
Total TerraForm Power, Inc. stockholders' equity
1,576,008

 
1,510,369

Non-controlling interests
703,342

 
859,999

Total stockholders' equity
2,279,350

 
2,370,368

Total liabilities, redeemable non-controlling interests and stockholders' equity
$
6,258,781

 
$
6,387,021


See accompanying notes to unaudited condensed consolidated financial statements.

6



TERRAFORM POWER, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except per share data)


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-controlling Interests
 
 
 
Class A Common Stock Issued
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
Common Stock Held in Treasury
 
 
 
 
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Total Equity
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Total
 
Capital
 
 
 
Total
 
Balance as of December 31, 2017
148,586

 
$
1,486

 
$
1,866,206

 
$
(398,629
)
 
$
48,018

 
(500
)
 
$
(6,712
)
 
$
1,510,369

 
$
1,057,301

 
$
(198,196
)
 
$
894

 
$
859,999

 
$
2,370,368

Cumulative-effect adjustment1

 

 

 
24,578

 
(4,164
)
 

 

 
20,414

 

 
(308
)
 

 
(308
)
 
20,106

Net income (loss)

 

 

 
83,233

 

 

 

 
83,233

 

 
(157,087
)
 

 
(157,087
)
 
(73,854
)
Dividends2

 

 
(28,008
)
 

 

 

 

 
(28,008
)
 

 

 

 

 
(28,008
)
Other comprehensive loss

 

 

 

 
(13,494
)
 

 

 
(13,494
)
 

 

 
(1,243
)
 
(1,243
)
 
(14,737
)
Contributions from non-controlling interests in renewable energy facilities

 

 

 

 

 

 

 

 
7,685

 

 

 
7,685

 
7,685

Distributions to non-controlling interests in renewable energy facilities

 

 

 

 

 

 

 

 
(5,204
)
 

 

 
(5,204
)
 
(5,204
)
Other

 

 
3,494

 

 

 

 

 
3,494

 

 
(500
)
 

 
(500
)
 
2,994

Balance as of March 31, 2018
148,586

 
$
1,486

 
$
1,841,692

 
$
(290,818
)
 
$
30,360

 
(500
)
 
$
(6,712
)
 
$
1,576,008

 
$
1,059,782

 
$
(356,091
)
 
$
(349
)
 
$
703,342

 
$
2,279,350

———
(1)
See Note 2. Summary of Significant Accounting Policies for discussion regarding the Company’s adoption of Accounting Standards Update No. 2014-09, Accounting Standards Update No. 2016-08 and Accounting Standards Update No. 2017-12 as of January 1, 2018.
(2)
On February 6, 2018, TerraForm Power, Inc. declared a quarterly dividend with respect to its Class A common stock of $0.19 per share. The dividend was paid on March 30, 2018 to shareholders of record as of February 28, 2018.

See accompanying notes to unaudited condensed consolidated financial statements.

7



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


 
Three Months Ended March 31,
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(76,367
)
 
$
(56,273
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation, accretion and amortization expense
65,590

 
60,987

Amortization of favorable and unfavorable rate revenue contracts, net
9,817

 
9,827

Impairment of renewable energy facilities
15,240

 

Amortization of deferred financing costs and debt discounts
2,684

 
4,639

Unrealized loss (gain) on commodity contract derivatives, net
2,148

 
(2,231
)
Recognition of deferred revenue
(464
)
 
(3,987
)
Stock-based compensation expense

 
2,509

Unrealized loss on foreign currency exchange, net
779

 
748

Deferred taxes
(882
)
 
639

Other, net
2,907

 
(22
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(6,410
)
 
(10,982
)
Prepaid expenses and other current assets
15,390

 
7,024

Accounts payable, accrued expenses and other current liabilities
18,527

 
19,858

Due to affiliates
(599
)
 

Deferred revenue
368

 
186

Other, net
3,361

 
2,306

Net cash provided by operating activities
52,089

 
35,228

Cash flows from investing activities:
 
 
 
Capital expenditures
(2,720
)
 
(2,076
)
Proceeds from reimbursable interconnection costs
4,084

 

Net cash provided by (used in) investing activities
1,364

 
(2,076
)
Cash flows from financing activities:
 
 
 
Revolving credit facility draws
52,000

 

Revolving credit facility repayments
(42,000
)
 
(5,000
)
Borrowings of non-recourse long-term debt

 
79,835

Principal payments on Term Loan and non-recourse long-term debt
(9,556
)
 
(11,870
)
Debt financing fees
(2,134
)
 
(2,791
)
Contributions from non-controlling interests in renewable energy facilities
7,685

 
6,935

Distributions to non-controlling interests in renewable energy facilities
(5,786
)
 
(9,692
)
Due to/from affiliates, net
3,214

 
(4,841
)
SunEdison investment

 
7,371

Payment of dividend
(28,008
)
 

Net cash (used in) provided by financing activities
(24,585
)
 
59,947

Net increase in cash, cash equivalents and restricted cash
28,868

 
93,099

Net change in cash, cash equivalents and restricted cash classified within assets held for sale

 
19,440

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(258
)
 
(471
)
Cash, cash equivalents and restricted cash at beginning of period
224,787

 
682,837

Cash, cash equivalents and restricted cash at end of period
$
253,397

 
$
794,905

 
 
 
 
Supplemental Disclosures:
 
 
 
Cash paid for interest
$
20,173

 
$
61,318

Cash paid for income taxes

 


See accompanying notes to unaudited condensed consolidated financial statements.

8



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


1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

On October 16, 2017, BRE TERP Holdings Inc., a wholly-owned subsidiary of Orion US Holdings 1 L.P. (“Orion Holdings”), merged with and into TerraForm Power, Inc. (“TerraForm Power”), with TerraForm Power continuing as the surviving corporation (the “Merger”). Prior to the consummation of the Merger, TerraForm Power and its subsidiaries (together, the “Company”) were controlled affiliates of SunEdison, Inc. (together with its consolidated subsidiaries excluding the Company and TerraForm Global, Inc. and its subsidiaries, “SunEdison”). As a result of the consummation of the Merger, a change of control of TerraForm Power occurred, and Orion Holdings, which is a controlled 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.

TerraForm Power is a holding company and its only material asset is an equity interest in TerraForm Power, LLC (“Terra LLC”), which through its subsidiaries owns and operates renewable energy facilities that have long-term contractual arrangements to sell the electricity generated by these facilities to third parties. The related green energy certificates, ancillary services and other environmental attributes generated by these facilities are also sold to third parties. TerraForm Power is the managing member of Terra LLC and operates, controls and consolidates the business affairs of Terra LLC. The Company is sponsored by Brookfield and has an objective to acquire operating solar and wind assets in North America and Western Europe.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the results of wholly-owned and partially-owned subsidiaries in which the Company has a controlling interest with all significant intercompany accounts and transactions eliminated and have been prepared in accordance with the SEC regulations for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. The financial statements should be read in conjunction with the accounting policies and other disclosures as set forth in the notes to the Company’s annual financial statements for the year ended December 31, 2017, filed with the SEC on Form 10-K on March 7, 2018. Interim results are not necessarily indicative of results for a full year.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments consisting of normal and recurring accruals necessary to present fairly the Company's financial position as of March 31, 2018 and the results of operations, comprehensive income (loss) and cash flows for the three months ended March 31, 2018 and 2017.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

Reclassification

The Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash during the second quarter of 2017, which requires retrospective application, and has revised its unaudited condensed consolidated statement of cash flows for the three months ended March 31, 2017 to include amounts generally described as restricted cash and restricted cash equivalents with cash and cash equivalents in the reconciliation of the beginning-of-period and end-of-period total amounts shown in the statement. Cash flows from investing activities for the three months ended March 31, 2017 decreased by $32.7 million as a result of the adoption of this standard. Further, the Company had


9




$21.3 million of restricted cash classified within assets held for sale as of March 31, 2017, with $54.8 million classified within assets held for sale as of December 31, 2016, and thus had to add the change in 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 three months ended March 31, 2017 to reconcile the change in the beginning and end-of-period cash, cash equivalents and restricted cash. The effect of exchange rate changes on cash and cash equivalents line was also revised to include the effect of exchange rate changes on restricted cash.

Reconciliation of Cash and Cash Equivalents and Restricted Cash as Presented in the Unaudited Condensed Consolidated Statement of Cash Flows

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets to the total of the same such amounts shown in the unaudited condensed consolidated statement of cash flows for the three months ended March 31, 2018.
(In thousands)
 
March 31, 2018
 
December 31, 2017
Cash and cash equivalents
 
$
157,833

 
$
128,087

Restricted cash - current
 
47,035

 
54,006

Restricted cash - non-current
 
48,529

 
42,694

Cash, cash equivalents and restricted cash shown in the unaudited condensed consolidated statement of cash flows
 
$
253,397

 
$
224,787


Restricted cash consists of cash on deposit in financial institutions that is restricted to satisfy the requirements of certain debt agreements and funds held within the Company's project companies that are restricted for current debt service payments and other purposes in accordance with the applicable debt agreements. These restrictions include: (i) cash on deposit in collateral accounts, debt service reserve accounts and maintenance reserve accounts; and (ii) cash on deposit in operating accounts but subject to distribution restrictions related to debt defaults existing as of the balance sheet date.

As discussed in Note 8. Long-term Debt, the Company was in default under certain of its non-recourse financing agreements as of the financial statement issuance date for the three months ended March 31, 2018 and for the year ended December 31, 2017. As a result, the Company reclassified $13.9 million and $18.8 million of non-current restricted cash to current as of March 31, 2018 and December 31, 2017, respectively, consistent with the corresponding debt classification, as the restrictions that required the cash balances to be classified as non-current restricted cash were driven by the financing agreements. As of March 31, 2018 and December 31, 2017, $20.5 million and $21.7 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.

Non-controlling Interests - Impact of the Tax Cuts and Jobs Act Enactment

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), which enacted major changes to the U.S. tax code, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. Since the 21% rate enacted in December 2017 went into effect on January 1, 2018, the hypothetical liquidation at book value (“HLBV”) methodology utilized by the Company to determine the value of its non-controlling interests began to use the new rate on that date. The HLBV method is a point in time estimate that utilizes inputs and assumptions in effect at each balance sheet date based on the liquidation provisions of the respective operating partnership agreements. During the first quarter of 2018, $151.2 million of the decline in the non-controlling interests balance and a corresponding allocation of net loss attributable to non-controlling interests was driven by this reduction in the tax rate used in the HLBV methodology used by the Company. In the calculation of the carrying values through HLBV, the Company allocated significantly lower amounts to certain non-controlling interests (i.e., tax equity investors) in order to achieve their contracted after-tax rate of return as a result of the reduction of the federal income tax rate from 35% to 21% as specified in the Tax Act.




10




Redeemable Non-controlling Interests

The following table presents the activity of the redeemable non-controlling interests balance for the three months ended March 31, 2018:
 
 
Redeemable Non-controlling Interests
(In thousands)
 
Capital
 
Retained Earnings
 
Total
Balance as of December 31, 2017
 
$
22,160

 
$
36,180

 
$
58,340

Cumulative-effect adjustment1
 

 
(4,485
)
 
(4,485
)
Distributions
 
(582
)
 

 
(582
)
Net loss
 

 
(2,513
)
 
(2,513
)
Balance as of March 31, 2018
 
$
21,578

 
$
29,182

 
$
50,760

———
(1)
See discussion below regarding the Company’s adoption of ASU No. 2014-09 and ASU No. 2016-08 as of January 1, 2018.

Restructuring

In connection with the consummation of the Merger and the expected relocation of the headquarters of the Company to New York, New York, the Company announced a restructuring plan that went into effect upon the closing of the Merger, which is expected to be completed early in the third quarter of 2018. The Company recognized $1.3 million of additional severance and transition bonus costs in the first quarter of 2018 within general and administrative expenses in the unaudited condensed consolidated statement of operations. The Company made $0.8 million of payments related to this restructuring in the first quarter of 2018. The balance of the accrued severance and transition bonuses was $3.2 million as of March 31, 2018.

Recently Adopted Accounting Standards - Guidance Adopted in 2018

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which replaces most existing revenue recognition guidance in U.S. GAAP and 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. Additionally, the new standard requires an entity to disclose further quantitative and qualitative information regarding the nature and amount of revenues arising from contracts with customers, as well as other information about the significant judgments and estimates used in recognizing revenues from contracts with customers. 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. The Company adopted these standards as of January 1, 2018, which it collectively refers to as “Topic 606.” The Company analyzed the impact of Topic 606 on its revenue contracts which primarily include bundled energy and incentive sales through power purchase agreements (“PPAs”), individual renewable energy certificate (“REC”) sales, and upfront sales of federal & state incentive benefits recorded as deferred revenue and accreted into revenue. The Company elected to apply a modified retrospective approach with a cumulative-effect adjustment to accumulated deficit recognized as of January 1, 2018 for changes to revenue recognition resulting from Topic 606 adoption as described below. The Company adopted Topic 606 for all revenue contracts in-scope that had future performance obligations at January 1, 2018, and elected to use the contract modification practical expedient for purposes of computing the cumulative transition adjustment. See Note 3. Revenue for additional disclosures required by the new guidance.
    
The Company accounts for the majority of its PPAs as operating leases under ASC 840, Leases and recognizes rental income as revenue when the electricity is delivered. The Company elected not to early adopt ASC 842, Leases in fiscal 2018 and therefore these PPAs are currently being evaluated in anticipation of the new lease standard adoption in fiscal 2019. For PPAs under the scope of Topic 606 in fiscal 2018, the Company concluded that there were no material changes to revenue recognition patterns from existing accounting practice. See Note 3. Revenue for the new revenue recognition policy.

The Company evaluated the impact of Topic 606 as it relates to the individual sale of RECs. In certain jurisdictions, there may be a lag between physical generation of the underlying energy and the transfer of RECs to the customer due to administrative processes imposed by state regulations. Under the Company’s previous accounting policy, revenue was recognized as the underlying electricity was generated if the sale had been contracted with the customer. Based on the


11




framework in Topic 606, for a portion of the existing individual REC sale arrangements where the transfer of control to the customer is determined to occur upon the transfer of the RECs, the Company now recognizes revenue commensurate with the transfer of RECs to the customer as compared to the generation of the underlying energy under the previous accounting policy. Revenue recognition practices for the remainder of existing individual REC sale arrangements remain the same; that is, revenue is recognized based on the underlying generation of energy because the contracted RECs are produced from a designated facility and control of the RECs transfers to the customer upon generation of the underlying energy. The adoption of Topic 606, as it relates to the individual sale of RECs, resulted in an increase in accumulated deficit on January 1, 2018 of $20.5 million, net of tax, and net of $0.3 million and $4.5 million that was allocated to non-controlling interests and redeemable non-controlling interests, respectively. The adjustments for accumulated deficit and non-controlling interests are reflected within cumulative-effect adjustment in the unaudited condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2018 and the redeemable non-controlling interests adjustment is reflected within cumulative-effect adjustment in the redeemable non-controlling interests roll-forward presented above. The impact on the Company’s results of operations for the first quarter of 2018 was minimal and is expected to be minimal for the remainder of 2018.

The Company evaluated the impact of Topic 606 as it relates to the upfront sale of investment tax credits (“ITCs”) through its lease pass-through fund arrangements. The amounts allocated to the ITCs were initially recorded as deferred revenue in the consolidated balance sheet, and subsequently, one-fifth of the amounts allocated to the ITCs was recognized annually as incentives revenue in the consolidated statement of operations based on the anniversary of each solar energy system’s placed-in-service date. The Company concluded that revenue related to the sale of ITCs through its lease pass-through arrangements should be recognized at the point in time when the related solar energy systems are placed in service. Previously, the Company recognized this revenue evenly over the five-year ITC recapture period. The Company concluded that the likelihood of a recapture event related to these assessments is remote. The adoption of Topic 606, as it relates to the upfront sale of ITCs, resulted in a decrease in accumulated deficit on January 1, 2018 of $40.9 million, net of tax, which is reflected within cumulative-effect adjustment in the unaudited condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2018. The impact on the Company’s results of operations for the first quarter of 2018 resulted in a decrease in non-cash deferred revenue recognition of $3.5 million and is expected to result in a decrease in non-cash deferred revenue recognition of approximately $12.8 million for the remaining nine months of 2018.

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 adoption of ASU No. 2016-15 is required to be applied retrospectively. The Company adopted ASU No. 2016-15 as of January 1, 2018, which did not result in any material adjustments to the Company’s 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. Previous GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party which resulted in diversity in practice and increased complexity within financial reporting. The amendments of ASU No. 2016-16 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 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 adoption of ASU No. 2016-16 as of January 1, 2018 did not have an impact on the Company’s 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 amendments should be applied prospectively on or after the effective dates. Accordingly, the Company’s adoption of ASU No. 2017-01 as of January 1, 2018 did not have an impact on the Company’s historical financial statements. The Company did not


12




consummate any acquisitions in the first quarter of 2018 but will apply this standard in the future should it consummate any acquisitions.

In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This ASU is meant to clarify the scope of ASC Subtopic 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets and to add guidance for partial sales of nonfinancial assets. ASU No. 2017-05 is to be applied using a full retrospective method or a modified retrospective method as outlined in the guidance. The adoption of ASU No. 2017-05 as of January 1, 2018 did not have an impact on the Company’s 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 amendments in this update should be applied prospectively to an award modified on or after the adoption date. Accordingly, the Company’s adoption of ASU No. 2017-09 as of January 1, 2018 did not have an impact on the Company’s historical financial statements. The Company did not have any unvested share-based payment awards outstanding during the first quarter of 2018 but will apply the impact of this standard in the future should it change the terms or conditions of any share-based payment awards.

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. ASU 2017-12 requires a modified retrospective transition method in which the Company recognizes the cumulative effect of the change on the opening balance of each affected component of equity as of the date of adoption. The Company adopted ASU 2017-12 on March 26, 2018 with the adoption impact reflected on a modified retrospective basis as of January 1, 2018, which resulted in the following primary changes:

The ineffective hedging portion of derivatives designated as hedging instruments is no longer required to be measured, recognized or reported. Alternatively, the entire change in the fair value of the designated hedging instrument is recorded in accumulated other comprehensive income (“OCI”);
The Company will perform ongoing prospective and retrospective hedge effectiveness assessments qualitatively after performing the initial test of hedge effectiveness on a quantitative basis and only to the extent that an expectation of high effectiveness can be supported on a qualitative basis in subsequent periods;
For derivatives with periodic cash settlements and a non-zero fair value at hedge inception, the accumulated gains or losses recorded in accumulated OCI in a qualifying cash flow hedging relationship are reclassified to earnings on a systematic and rational basis over the hedge term; and
For derivatives with components excluded from the assessment of hedge effectiveness, the accumulated gains or losses recorded in accumulated OCI on such excluded components in a qualifying cash flow hedging relationship are reclassified to earnings on a systematic and rational basis over the hedge term.

The adoption of ASU 2017-12 resulted in a cumulative-effect adjustment of $4.2 million, net of tax of $1.6 million, representing a decrease in accumulated deficit and accumulated OCI, which is reflected within cumulative-effect adjustment in the unaudited condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2018.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The ASU added seven paragraphs to ASC 740, Income Taxes, that contain SEC guidance related to the application of U.S. GAAP when preparing an initial accounting of the income tax effects of the Tax Act which, among other things, allows for a measurement period not to exceed one year for companies to finalize the provisional amounts recorded as of December 31, 2017. The ASU was effective upon issuance. See Note 9. Income Taxes for disclosures on the Company’s accounting for the Tax Act.



13




Recently Issued Accounting Standards Not Yet Adopted

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. The Company expects to adopt the standard on January 1, 2019. The issued guidance requires a modified retrospective transition approach, which requires entities to recognize and measure leases at the beginning of the earliest period presented. In January 2018, the FASB proposed amending the standard to give entities another option for transition. The proposed transition method would allow entities to initially apply the requirements of the standard in the period of adoption (January 1, 2019). The Company will assess this transition option if the FASB issues the revised standard. The Company expects to elect certain of the practical expedients permitted in the issued standard, including the expedient that permits the Company to retain its existing lease assessment and classification. In January 2018, the FASB issued additional guidance which provides another optional transition practical expedient that allows entities to not evaluate existing and expired land easements under the new guidance at adoption if they were not previously accounted for as leases. The Company is currently working through an adoption plan which includes the evaluation of lease contracts compared to the new standard. While the Company is currently evaluating the impact the new guidance will have on its financial position and results of operations, the Company expects to recognize lease liabilities and right of use assets. The extent of the increase to assets and liabilities associated with these amounts remains to be determined pending the Company’s review of its existing lease contracts which may contain embedded leases.

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. The Company will evaluate the impact of this standard in the future should it consummate any acquisition that results in the recognition of goodwill.
    
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income to help entities address certain stranded income tax effects in accumulated OCI resulting from the U.S. government’s enactment of the Tax Act on December 22, 2017. The amendment provides entities with an option to reclassify stranded tax effects within accumulated OCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act (or portion thereof) is recorded. The amendment also includes disclosure requirements regarding the issuer’s accounting policy for releasing income tax effects from accumulated OCI. The optional guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, and entities should apply the provisions of the amendment either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company is currently evaluating the effect of the new guidance on its consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU amends and supersedes various paragraphs that contain SEC guidance in ASC 320, Investments - Debt Securities and ASC 980, Regulated Operations. ASU No. 2018-03 is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017 and June 15, 2018 are not required to adopt these amendments until the interim period beginning after June 15, 2018. The Company is currently evaluating the effect of the new guidance on its consolidated financial statements.



14




3. REVENUE

As discussed in Note 2. Summary of Significant Accounting Policies, on January 1, 2018, the Company adopted Topic 606. The following tables present revenue disaggregated by segment and major product for the three months ended March 31, 2018 and provide a reconciliation of the adoption impact of Topic 606 on the unaudited condensed consolidated statement of operations for the three months ended March 31, 2018 and unaudited condensed consolidated balance sheet as of March 31, 2018. There was no net impact on net cash provided by operating activities in the unaudited condensed consolidated statement of cash flows for the three months ended March 31, 2018 resulting from the adoption of Topic 606.

Topic 606 Adoption Impact on Unaudited Condensed Consolidated Statement of Operations
 
 
Three Months Ended March 31, 2018
 
 
As Reported
 
Adjustments
 
Amounts excluding Topic 606 Adoption
(In thousands)
 
Solar
 
Wind
 
Total
 
REC Sales
 
ITC Sales
 
PPA rental income
 
$
36,768

 
$
52,413

 
$
89,181

 
$

 
$

 
$
89,181

Commodity derivatives
 

 
11,007

 
11,007

 

 

 
11,007

PPA revenue
 
6,507

 
6,692

 
13,199

 

 

 
13,199

Amortization of favorable and unfavorable rate revenue contracts, net
 
(1,977
)
 
(7,840
)
 
(9,817
)
 

 

 
(9,817
)
Energy revenue
 
41,298

 
62,272

 
103,570

 

 

 
103,570

Incentive revenue
 
18,425

 
5,552

 
23,977

 
(2,560
)
 
3,518

 
24,935

Operating revenues, net
 
59,723

 
67,824

 
127,547

 
(2,560
)
 
3,518

 
128,505

Operating costs and expenses
 
 
 
 
 
149,596

 

 

 
149,596

Operating loss
 
 
 
 
 
(22,049
)
 
(2,560
)
 
3,518

 
(21,091
)
Other expenses, net
 
 
 
 
 
55,294

 

 

 
55,294

Loss before income tax benefit
 
 
 
 
 
(77,343
)
 
(2,560
)
 
3,518

 
(76,385
)
Income tax benefit
 
 
 
 
 
(976
)
 

 

 
(976
)
Net loss
 
 
 
 
 
$
(76,367
)
 
$
(2,560
)
 
$
3,518

 
$
(75,409
)


15




Topic 606 Adoption Impact on Unaudited Condensed Consolidated Balance Sheet
 
 
As of March 31, 2018
 
 
As
Reported
 
Adjustments
 
Amounts excluding Topic 606 Adoption
(In thousands)
 
 
REC Sales
 
ITC Sales
 
Accounts receivable, net
 
$
70,346

 
$
22,715

 
$

 
$
93,061

Other current assets
 
253,197

 

 

 
253,197

Total current assets
 
323,543

 
22,715

 

 
346,258

Non-current assets
 
5,935,238

 

 

 
5,935,238

Total assets
 
$
6,258,781

 
$
22,715

 
$

 
$
6,281,496

 
 
 
 
 
 
 
 
 
Deferred revenue
 
$
1,807

 
$

 
$
16,310

 
$
18,117

Other current liabilities
 
502,464

 

 

 
502,464

Total current liabilities
 
504,271

 

 
16,310

 
520,581

Deferred revenue, less current portion
 
13,134

 

 
21,069

 
34,203

Other non-current liabilities
 
3,411,266

 

 

 
3,411,266

Total liabilities
 
3,928,671

 

 
37,379

 
3,966,050

Redeemable non-controlling interests and total stockholders' equity
 
2,330,110

 
22,715

 
(37,379
)
 
2,315,446

Total liabilities, redeemable non-controlling interests and stockholders' equity
 
$
6,258,781

 
$
22,715

 
$

 
$
6,281,496


PPA rental income

The majority of the Company’s energy revenue is derived from long-term PPAs accounted for as operating leases under ASC 840, Leases. Rental income under these leases is recorded as revenue when the electricity is delivered. The Company will adopt ASC 842, Leases on January 1, 2019. The Company is currently working through an adoption plan which includes the evaluation of lease contracts compared to the new standard and may elect certain of the practical expedients permitted in the issued standard, including the expedient that permits the Company to retain its existing lease assessment and classification.

Commodity derivatives

The Company has certain revenue contracts within its wind fleet that are accounted for as derivatives under the scope of ASC 815, Derivatives and Hedging. Amounts recognized within operating revenues, net in the unaudited condensed consolidated statements of operations consist of cash settlements and unrealized gains and losses representing changes in fair value for the commodity derivatives that are not designated as hedging instruments. See Note 10. Derivatives for further discussion.

PPA revenue

PPAs that are not accounted for under the scope of leases or derivatives are accounted for under Topic 606. The Company typically delivers bundled goods consisting of energy and incentive products for a singular rate based on a unit of generation at a specified facility over the term of the agreement. In these type of arrangements, volume reflects total energy generation measured in kilowatt hours (“kWhs”) which can vary period to period depending on system and resource availability. The contract rate per unit of generation (kWhs) is generally fixed at contract inception; however, certain pricing arrangements can provide for time-of-delivery, seasonal or market index adjustment mechanisms over time. The customer is invoiced monthly equal to the volume of energy delivered multiplied by the applicable contract rate.

The Company considers bundled energy and incentive products within PPAs to be distinct performance obligations. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied under Topic 606. The Company views the sale of energy as a series of distinct goods that is


16




substantially the same and has the same pattern of transfer measured by the output method. Although the Company views incentive products in bundled PPAs to be performance obligations satisfied at a point in time, measurement of satisfaction and transfer of control to the customer in a bundled arrangement coincides with a pattern of revenue recognition with the underlying energy generation. Accordingly, the Company applied the practical expedient in Topic 606 as the right to consideration corresponds directly to the value provided to the customer to recognize revenue at the invoice amount for its PPA contracts.

For the three months ended March 31, 2018, the Company’s energy revenue from PPA contracts with customers was $13.2 million. As of March 31, 2018, the Company’s receivable balances related to PPA contracts with customers was approximately $6.4 million. Trade receivables for PPA contracts are reflected in accounts receivable, net in the unaudited condensed consolidated balance sheets. The Company typically receives payment within 30 days for invoiced PPA revenue. The Company does not have any other significant contract asset or liability balances related to PPA revenue.

Energy revenues yet to be earned under these contracts are expected to be recognized between 2018 and 2043. The Company applies the practical expedient in Topic 606 to its bundled PPA contract arrangements, and accordingly, does not disclose the value of unsatisfied performance obligations for contracts for which it recognizes revenue at the amount to which it has the right to invoice for services performed.

Amortization of favorable and unfavorable rate revenue contracts, net
    
The Company accounts for its business combinations by recognizing in the financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interests in the acquiree at fair value at the acquisition date. Intangible amortization of certain revenue contracts acquired in business combinations (favorable and unfavorable rate PPAs and REC agreements) is recognized on a straight-line basis over the remaining contract term. The current period amortization for favorable rate revenue contracts is reflected as a reduction to operating revenues, net, and amortization for unfavorable rate revenue contracts is reflected as an increase to operating revenues, net. There was no impact related to the adoption of Topic 606. See Note 6. Intangibles.

Incentive revenue
    
The Company generates incentive revenue from individual incentive agreements relating to the sale of RECs and performance-based incentives (“PBIs”) to third-party customers that are not bundled with the underlying energy output. The majority of individual REC sales reflect a fixed quantity, fixed price structure over a specified term. The Company views REC products in these arrangements as distinct performance obligations satisfied at a point in time. Since the REC products delivered to the customer are not linked to the underlying generation of a specified facility, these RECs are now recognized into revenue when delivered and invoiced under Topic 606. This was a change from the Company’s prior year accounting policy which recognized REC sales upon underlying electricity generation as discussed in Note 2. Summary of Significant Accounting Policies. The impact of the adoption resulted in a decrease in operating revenues, net of $2.6 million during the first quarter of 2018. Incentive revenues yet to be earned for fixed price incentive contracts are expected to be $67.0 million and recognized between 2018 and 2023. The Company typically receives payment within 30 days of invoiced REC revenue.

For certain incentive contract arrangements, the quantity delivered to the customer is linked to a specific facility. Similar to PPA revenues under Topic 606, the pattern of revenue recognition for these incentive arrangements is recognized over time coinciding with the underlying revenue generation which is consistent with the Company’s policy prior to the adoption of Topic 606. For the three months ended March 31, 2018, the Company’s incentive revenue from facility-linked contracts with customers was $5.5 million. Revenue accruals for facility linked incentive contracts within accounts receivable, net were $5.5 million as of March 31, 2018. The Company applied the practical expedient in Topic 606 to its variable consideration incentive contract arrangements where revenues are linked to the underlying generation of the renewable energy facilities, and accordingly does not disclose the value of unsatisfied performance obligations for contracts for which it recognizes revenue at the amount to which it has the right to invoice for services performed.

Prior to the adoption of Topic 606, the Company deferred sales of ITCs through its lease pass-through fund arrangements as a deferred revenue liability in the unaudited condensed consolidated balance sheet. As discussed in Note 2. Summary of Significant Accounting Policies, the Company now recognizes revenue related to the sales of ITCs at the point in time when the related solar energy systems are placed in service. The Company concluded that the likelihood of a recapture event related to these assessments is remote. Under Topic 605, the Company would have recognized an increase of $3.5 million in non-cash deferred revenue within operating revenues, net for the three months ended March 31, 2018. The remaining


17




deferred revenue balance in the unaudited condensed consolidated balance sheet as of March 31, 2018 consisted of upfront government incentives of $9.0 million and contract liabilities of $5.9 million related to performance obligations that have not yet been satisfied. These contract liabilities represent advanced customer receipts primarily related to future REC deliveries that are recognized into revenue under Topic 606. The amount of revenue recognized during the three months ended March 31, 2018 related to contract liabilities was $0.3 million.

4. ACQUISITIONS

Irrevocable Agreements to Launch Tender Offer for the Common Shares of Saeta Yield

On February 7, 2018, the Company announced its agreement to launch a voluntary tender offer (the “Tender Offer”) to acquire 100% of the outstanding shares of Saeta Yield, S.A. (“Saeta Yield”), a Spanish corporation and a publicly-listed European owner and operator of wind and solar assets, located primarily in Spain. In April of 2018, the Company received approval from the Spanish National Securities Market Commission (Comisión Nacional del Mercado de Valores) (the “CNMV”) of the prospectus for the Tender Offer, which was launched on May 3, 2018, at a price of 12.20 Euros per share of Saeta Yield. On May 8, 2018, the board of directors of Saeta Yield issued a unanimous favorable opinion of the Tender Offer. The Tender Offer is expected to be completed by mid-summer of 2018, subject to certain closing conditions.

In connection with this Tender Offer, on February 6, 2018, TERP Spanish HoldCo, S.L. (“TERP Spanish HoldCo”), a subsidiary of the Company, entered into an irrevocable undertaking agreement for the launch and acceptance of the takeover bid for the shares of Saeta Yield with Cobra Concesiones, S.L., a company incorporated under the laws of Spain (“Cobra”), and GIP II Helios, S.à r.l., a société à responsabilité limitée organized under the laws of the Grand Duchy of Luxembourg (“GIP”), as well as two separate irrevocable undertaking agreements with Mutuactivos, S.A.U., S.G.I.I.C., a company incorporated under the laws of Spain (“Mutuactivos”), and with Sinergia Advisors 2006, A.V., S.A., a company incorporated under the laws of Spain (“Sinergia” and, together with Cobra, GIP and Mutuactivos, the “Selling Stockholders”). Under the terms of these irrevocable undertaking agreements, the Selling Stockholders have irrevocably and unconditionally agreed to tender their combined 50.338% interest in Saeta Yield in the Tender Offer.

The Company’s acceptance of the shares of Saeta Yield tendered in the Tender Offer is conditioned upon the Company obtaining compulsory authorization required from the European Commission, which has been obtained, and Cobra and GIP irrevocably accepting the Tender Offer in respect of their shares of Saeta Yield representing no less than 48.222% of Saeta Yield’s voting share capital.

The aggregate value of the shares of Saeta Yield held by the Selling Stockholders is approximately $600 million. If the Company successfully acquires all of the remaining Saeta Yield shares in the Tender Offer, the aggregate purchase price (including the value of the Selling Stockholders shares) will be approximately $1.2 billion. Assuming a $1.2 billion acquisition price, the Company intends to finance the acquisition with an equity issuance of the Company’s Class A common stock in a minimum amount of $400 million (the “Equity Offering”). The remainder will be financed from the Company’s available liquidity, which is expected to include borrowings under the Revolver (as defined in Note 8. Long-term Debt) and the Sponsor Line Agreement (as defined in Note 14. Related Parties). The Company believes that it may be prudent to consider increasing the Equity Offering used to fund the Tender Offer from $400 million up to a maximum of $650 million. An increase in the Equity Offering may further strengthen the Company’s financial position, ensure ample access to liquidity, and decrease any borrowings needed to fund the acquisition. The Company expects to repay these borrowings with a combination of sources, including new non-recourse financings of the Company’s currently unencumbered wind and solar assets and certain cash released from Saeta Yield’s assets. See Note 14. Related Parties for discussion regarding the Back-Stop Agreement (as defined therein) that the Company entered into with Brookfield in connection with the expected Equity Offering.

In connection with the launch of the Tender Offer, the Company was required to post a bank guarantee (the “Bank Guarantee”) with the CNMV for the maximum amount payable in the Tender Offer of approximately $1.2 billion. On March 6, 2018, TERP Spanish HoldCo entered into two letter of credit facilities (the “LC Agreements”) pursuant to which two banks posted the Bank Guarantee with the CNMV for the maximum amount payable in the Tender Offer. On March 6, 2018, TerraForm Power entered into two letter agreements (the “Letter Agreements” and together with the LC Agreements, the “Letter of Credit Facilities”) with those banks. The LC Agreements govern TERP Spanish HoldCo’s obligations to reimburse those banks upon any drawing under the Bank Guarantee. The Letter Agreements govern TerraForm Power’s obligation to utilize drawings on its Revolver and Sponsor Line Agreement or proceeds from an equity offering of its Class A common stock to contribute funds to TERP Spanish HoldCo to enable TERP Spanish HoldCo to satisfy its reimbursement obligations under


18




the LC Agreements. The Letter of Credit Facilities also contain customary fees, representations and warranties, covenants and events of default. Under the terms of the Letter of Credit Facilities, the Company is required to maintain minimum liquidity requirements of $500.0 million under the Sponsor Line Agreement and $400.0 million under the Revolver. In addition, if any amount is drawn under the Bank Guarantee, or if an event of default occurs under the Letter of Credit Facilities, the Company may be required to cash collateralize the entire amount of the Bank Guarantee that has not been drawn.

Acquisition Costs

Acquisition costs incurred by the Company related to the pending acquisition of Saeta Yield were $3.7 million for the three months ended March 31, 2018. These costs are reflected as acquisition and related costs in the unaudited condensed consolidated statement of operations (see Note 14. Related Parties). There were no acquisition costs incurred by the Company for the three months ended March 31, 2017.

5. RENEWABLE ENERGY FACILITIES

Renewable energy facilities, net consists of the following: 
(In thousands)
 
March 31, 2018
 
December 31, 2017
Renewable energy facilities in service, at cost
 
$
5,344,488

 
$
5,378,462

Less accumulated depreciation - renewable energy facilities
 
(626,766
)
 
(578,474
)
Renewable energy facilities in service, net
 
4,717,722

 
4,799,988

Construction in progress - renewable energy facilities
 
2,086

 
1,937

Total renewable energy facilities, net
 
$
4,719,808

 
$
4,801,925


Depreciation expense related to renewable energy facilities was $57.1 million and $52.2 million for the three months ended March 31, 2018 and 2017, respectively.

For the periods presented above, construction in progress primarily represents initial costs incurred for the construction of a new battery energy storage system for one of the Company's wind power plants, for which construction began in the fourth quarter of 2017.

Impairment Charge

The Company reviews long-lived assets that are held and used for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company currently has a REC sales agreement with a customer expiring December 31, 2021 that is significant to an operating project within the Enfinity solar distributed generation portfolio, and on March 31, 2018, this customer filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The potential replacement of this contract would likely result in a significant decrease in expected revenues for this operating project. The Company’s analysis indicated that the bankruptcy filing was a triggering event to perform an impairment evaluation, and the carrying amount of $19.5 million as of March 31, 2018 was no longer considered recoverable based on an undiscounted cash flow forecast. The Company estimated the fair value of the operating project at $4.3 million as of March 31, 2018 and recognized an impairment charge of $15.2 million equal to the difference between the carrying amount and the estimated fair value, which is reflected within impairment of renewable energy facilities in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2018. The Company used an income approach methodology of valuation to determine fair value by applying a discounted cash flow method to the forecasted cash flows of the operating project, which was categorized as a Level 3 fair value measurement due to the significance of unobservable inputs. Key estimates used in the income approach included forecasted power and incentive prices, customer renewal rates, operating and maintenance costs and the discount rate. There were no long-lived asset impairment charges recognized during the three months ended March 31, 2017.



19




6. INTANGIBLES

The following table presents the gross carrying amount, accumulated amortization and net book value of intangibles as of March 31, 2018:
(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
 
$
713,786

 
$
(110,230
)
 
$
603,556

In-place value of market rate revenue contracts
 
18 years
 
520,079

 
(79,349
)
 
440,730

Favorable rate land leases
 
17 years
 
15,800

 
(2,529
)
 
13,271

Total intangible assets, net
 
 
 
$
1,249,665

 
$
(192,108
)
 
$
1,057,557

 
 
 
 
 
 
 
 
 
Unfavorable rate revenue contracts
 
7 years
 
$
33,686

 
$
(15,952
)
 
$
17,734

Unfavorable rate operations and maintenance contracts
 
2 years
 
5,000

 
(2,865
)
 
2,135

Unfavorable rate land lease
 
15 years
 
1,000

 
(176
)
 
824

Total intangible liabilities, net1
 
 
 
$
39,686

 
$
(18,993
)
 
$
20,693

    
The following table presents the gross carrying amount, accumulated amortization and net book value of intangibles as of December 31, 2017:
(In thousands, except weighted average amortization period)
 
Weighted Average Amortization Period
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book Value
Favorable rate revenue contracts
 
15 years
 
$
718,639

 
$
(102,543
)
 
$
616,096

In-place value of market rate revenue contracts
 
19 years
 
521,323

 
(73,104
)
 
448,219

Favorable rate land leases
 
17 years
 
15,800

 
(2,329
)
 
13,471

Total intangible assets, net
 
 
 
$
1,255,762

 
$
(177,976
)
 
$
1,077,786

 
 
 
 
 
 
 
 
 
Unfavorable rate revenue contracts
 
7 years
 
$
35,086

 
$
(16,030
)
 
$
19,056

Unfavorable rate operations and maintenance contracts
 
2 years
 
5,000

 
(2,552
)
 
2,448

Unfavorable rate land lease
 
15 years
 
1,000

 
(162
)
 
838

Total intangible liabilities, net1
 
 
 
$
41,086

 
$
(18,744
)
 
$
22,342

———
(1)
The Company’s intangible liabilities are classified within other long-term liabilities in the unaudited condensed consolidated balance sheets.

Amortization expense related to favorable rate revenue contracts is reflected in the unaudited condensed consolidated statements of operations as a reduction of operating revenues, net. Amortization related to unfavorable rate revenue contracts is reflected in the unaudited condensed consolidated statements of operations as an increase to operating revenues, net. During the three months ended March 31, 2018 and 2017, net amortization expense related to favorable and unfavorable rate revenue contracts resulted in a reduction of operating revenues, net of $9.8 million.

Amortization expense related to the in-place value of market rate revenue contracts is reflected in the unaudited condensed consolidated statements of operations within depreciation, accretion and amortization expense. During the three months ended March 31, 2018 and 2017, amortization expense related to the in-place value of market rate revenue contracts was $6.4 million.

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 operations and maintenance (“O&M”) contracts is reflected in the unaudited condensed consolidated statements of operations


20




as a reduction of cost of operations. During the three months ended March 31, 2018 and 2017, net amortization related to favorable and unfavorable rate land leases and unfavorable rate O&M contracts resulted in a $0.1 million reduction of cost of operations.

7. VARIABLE INTEREST ENTITIES

The Company consolidates variable interest entities ("VIEs") in renewable energy facilities when the Company is the primary beneficiary. The VIEs own and operate renewable energy facilities in order to generate contracted cash flows. The VIEs were funded through a combination of equity contributions from the owners and non-recourse, project-level debt. No VIEs were deconsolidated during the three months ended March 31, 2018 and 2017.

The carrying amounts and classification of the consolidated VIEs’ assets and liabilities included in the Company’s unaudited condensed consolidated balance sheets are as follows:
(In thousands)
 
March 31, 2018
 
December 31, 2017
Current assets
 
$
122,410

 
$
142,403

Non-current assets
 
4,100,306

 
4,155,558

Total assets
 
$
4,222,716

 
$
4,297,961

Current liabilities
 
$
99,198

 
$
119,021

Non-current liabilities
 
996,712

 
975,839

Total liabilities
 
$
1,095,910

 
$
1,094,860


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.



21




8. LONG-TERM DEBT
    
Long-term debt consists of the following:
(In thousands, except rates)
 
March 31, 2018
 
December 31, 2017
 
Interest Type
 
Interest Rate (%)1
 
Financing Type
Corporate-level long-term debt2:
 
 
 
 
 
 
 
 
 
 
Senior Notes due 2023
 
$
500,000

 
$
500,000

 
Fixed
 
4.25
 
Senior notes
Senior Notes due 2025
 
300,000

 
300,000

 
Fixed
 
6.63
 
Senior notes
Senior Notes due 2028
 
700,000

 
700,000

 
Fixed
 
5.00
 
Senior notes
Revolver3
 
70,000

 
60,000

 
Variable
 
4.86
 
Revolving loan
Term Loan4
 
349,125

 
350,000

 
Variable
 
4.63
 
Term debt
Non-recourse long-term debt5:
 
 
 
 
 
 
 
 
 
 
Permanent financing
 
1,602,675

 
1,616,729

 
Blended6
 
5.727
 
Term debt / Senior notes
Financing lease obligations
 
114,730

 
115,787

 
Imputed
 
5.607
 
Financing lease obligations
Total principal due for long-term debt and financing lease obligations
 
3,636,530

 
3,642,516

 
 
 
5.337
 
 
Unamortized discount, net
 
(18,297
)
 
(19,027
)
 
 
 
 
 
 
Deferred financing costs, net
 
(23,862
)
 
(24,689
)
 
 
 
 
 
 
Less current portion of long-term debt and financing lease obligations
 
(391,656
)
 
(403,488
)
 
 
 
 
 
 
Long-term debt and financing lease obligations, less current portion
 
$
3,202,715

 
$
3,195,312

 
 
 
 
 
 
———
(1)
As of March 31, 2018.
(2)
Outstanding corporate-level debt represents debt issued by TerraForm Power Operating, LLC (“Terra Operating LLC”) and guaranteed by Terra LLC and certain subsidiaries of Terra Operating LLC other than non-recourse subsidiaries as defined in the relevant debt agreements (with the exception of certain unencumbered non-recourse subsidiaries).
(3)
On February 6, 2018, Terra Operating LLC elected to increase the total borrowing capacity of its $450.0 million senior secured revolving credit facility (the “Revolver”), available for revolving loans and letters of credit, to $600.0 million. As discussed in Note 4. Acquisitions, per the terms of the Letter of Credit Facilities the Company entered into in connection with posting the Bank Guarantee for the maximum amount payable in the Tender Offer, the Company is required to maintain a minimum liquidity requirement of $400.0 million under the Revolver.
(4)
On May 11, 2018, the Company signed a repricing amendment whereby the interest rate on the Term Loan was reduced by 0.75% per annum.
(5)
Non-recourse debt represents debt issued by subsidiaries with no recourse to TerraForm Power, 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. In connection with these financings and in the ordinary course of its business, TerraForm Power 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 of the Company’s corporate-level debt.
(6)
Includes fixed rate debt and variable rate debt. As of March 31, 2018, 60% of this balance had a fixed interest rate and the remaining 40% of this balance had a variable interest rate. The Company entered into interest rate swap agreements to fix the interest rates of a majority of the variable rate permanent financing non-recourse debt (see Note 10. Derivatives).
(7)
Represents the weighted average interest rate as of March 31, 2018.

Non-recourse Debt Defaults

Over the course of 2016 and 2017, the Company experienced defaults in its non-recourse debt financings that principally arose as a result of the filing for bankruptcy of certain SunEdison subsidiaries that served as providers of O&M or asset management services to its renewable energy facilities (or as guarantors of those service providers) and as a result of the failure of the applicable Company subsidiary or the Company to timely deliver audited or unaudited financial statements and other deliverables required by the applicable financing arrangements. With the exception of its 101.6 MW renewable energy facility in Chile, to date the Company has transitioned all the project-level services provided by SunEdison to third parties or in-house. The Company has also delivered all outstanding Company and project-level financial statements and deliverables as of


22




the date hereof, has substantially obtained all waivers needed for late delivery of financial statements that were delivered after the grace period expired and expects to complete its future project-level financial statement deliverables within the required time periods (taking into account the respective grace periods) for their delivery.

As of March 31, 2018 and December 31, 2017, the Company reclassified $216.3 million and $239.7 million, respectively, of the Company's non-recourse long-term indebtedness, net of unamortized debt discounts and deferred financing costs, to current in the unaudited condensed consolidated balance sheets due to defaults still remaining as of the respective financial statement issuance date, which primarily consisted of indebtedness of the Company’s renewable energy facility in Chile. The Company continued to amortize deferred financing costs and debt discounts over the maturities of the respective financing agreements as before the violations, as the Company believed there was a reasonable likelihood that it would be able to successfully negotiate a waiver with the lenders and/or cure the defaults. The Company based this conclusion 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) the Company's timely servicing of these debt instruments and (iv) the fact that 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.

Refer to Note 2. Summary of Significant Accounting Policies for discussion of corresponding restricted cash reclassifications to current as a result of these defaults. There were no corresponding interest rate swap reclassifications needed as a result of these remaining defaults.

Canada Project-level Financing Upsize

On February 28, 2017, the Company increased the principal amount of a non-recourse credit facility that is secured by approximately 59 MW of utility-scale solar power plants located in Canada that are owned by the Company’s subsidiaries by an additional 113.9 million Canadian Dollars (“CAD”) (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 primarily used for general corporate purposes.

Maturities

The aggregate contractual principal payments of long-term debt due after March 31, 2018, 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 20181
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
Maturities of long-term debt2
$
162,194

 
$
110,248

 
$
104,970

 
$
108,015

 
$
596,658

 
$
2,554,445

 
$
3,636,530

———
(1)
Includes $70.0 million of Revolver indebtedness, of which the Company repaid $55.0 million with cash on hand in April of 2018.
(2)
Represents the contractual principal payment due dates for the Company's long-term debt and does not reflect the reclassification of $216.3 million of long-term debt to current as a result of debt defaults under certain of the Company's non-recourse financing arrangements.

9. INCOME TAXES

The income tax provision consisted of the following:

 
Three Months Ended March 31,
(In thousands, except effective tax rate)
 
2018
 
2017
Loss before income tax benefit
 
$
(77,343
)
 
$
(57,191
)
Income tax benefit
 
(976
)
 
(918
)
Effective tax rate
 
1.3
%
 
1.6
%

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


23




ended March 31, 2017, the Company recorded income tax on its 65.7% of Terra LLC’s taxable income and SunEdison recorded income tax on its 34.3% share of Terra LLC’s taxable income. On October 16, 2017, pursuant to the settlement agreement the Company entered into with SunEdison on March 6, 2017 (the “Settlement Agreement”), SunEdison transferred its interest in Terra LLC to TerraForm Power. As a result, TerraForm Power now owns 100% of the capital and profits interest in Terra LLC, except for the incentive distribution rights (“IDRs”) which are owned by BRE Delaware, Inc. (the “Brookfield IDR Holder”), an indirect wholly-owned subsidiary of Brookfield, and it recorded income tax on its 100% share of Terra LLC’s taxable income for the three months ended March 31, 2018.

For the three months ended March 31, 2018 and 2017, the overall effective tax rate was different than the statutory rate of 21% and 35%, respectively, 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 foreign and state taxes. As of March 31, 2018, most jurisdictions were in a net deferred tax asset position. A valuation allowance is recorded against the deferred tax assets primarily due to the history of losses in those jurisdictions with the exception of Canada, Puerto Rico and one of the Company’s U.S. portfolios. The recognition of an income tax benefit of $1.0 million for the three months ended March 31, 2018 was mostly driven by the loss generated in Canada. As of March 31, 2018, the Company had not identified any uncertain tax positions for which a liability was required.

Due to the enactment of the Tax Act on December 22, 2017, the U.S. federal corporate income tax rate was reduced from 35% to 21%, effective January 1, 2018. As a result, the Company performed a preliminary analysis to revalue its deferred income taxes and included a net reduction in deferred liabilities of $5 million as of December 31, 2017. While the Company continues to believe that the provisional Tax Act adjustments are reasonable estimates of the effects on its existing deferred taxes, additional analysis and detailed reviews are still being performed to finalize the accounting for the re-measurement of deferred tax assets and liabilities as a result of the enactment of the Tax Act.

10. DERIVATIVES

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



24




As of March 31, 2018 and December 31, 2017, fair values of the following derivative instruments were included in the balance sheet captions indicated below:
 
 
Fair Value of Derivative Instruments
 
 
 
 
 
 
 
 
Derivatives Designated as Hedging Instruments
 
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
(In thousands)
 
Interest Rate Swaps
 
Commodity Contracts
 
Interest Rate Swaps
 
Foreign Currency Contracts
 
Commodity Contracts
 
Gross Amounts of Assets/Liabilities Recognized
 
Gross Amounts Offset in Consolidated Balance Sheet
 
Net Amounts in Consolidated Balance Sheet
As of March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
$
392

 
$
1,475

 
$

 
$
1,491

 
$
13,595

 
$
16,953

 
$
(1,491
)
 
$
15,462

Other assets
 
9,469

 
59,065

 

 

 
11,763

 
80,297

 

 
80,297

Total assets
 
$
9,861

 
$
60,540

 
$

 
$
1,491

 
$
25,358

 
$
97,250

 
$
(1,491
)
 
$
95,759

Accounts payable, accrued expenses and other current liabilities
 
$
815

 
$
392

 
$
130

 
$
2,640

 
$

 
$
3,977

 
$
(1,491
)
 
$
2,486

Other long-term liabilities
 
2,869

 

 
184

 

 

 
3,053

 

 
3,053

Total liabilities
 
$
3,684

 
$
392

 
$
314

 
$
2,640

 
$

 
$
7,030

 
$
(1,491
)
 
$
5,539

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
$

 
$
8,961

 
$

 
$
63

 
$
12,609

 
$
21,633

 
$
(63
)
 
$
21,570

Other assets
 
4,686

 
71,307

 

 

 
14,787

 
90,780

 

 
90,780

Total assets
 
$
4,686

 
$
80,268

 
$

 
$
63

 
$
27,396

 
$
112,413

 
$
(63
)
 
$
112,350

Accounts payable, accrued expenses and other current liabilities
 
$
2,490

 
$

 
$
197

 
$
99

 
$

 
$
2,786

 
$
(63
)
 
$
2,723

Other long-term liabilities
 
4,796

 

 
404

 

 

 
5,200

 

 
5,200

Total liabilities
 
$
7,286

 
$

 
$
601

 
$
99

 
$

 
$
7,986

 
$
(63
)
 
$
7,923


As of March 31, 2018 and December 31, 2017, notional amounts for derivative instruments consisted of the following:
 
 
Notional Amount as of
(In thousands)
 
March 31, 2018
 
December 31, 2017
Derivatives designated as hedging instruments:
 
 
 
 
Interest rate swaps (USD)
 
387,681

 
395,986

Interest rate swaps (CAD)
 
155,270

 
156,367

Commodity contracts (MWhs)
 
15,201

 
15,579

Derivatives not designated as hedging instruments:
 
 
 
 
Interest rate swaps (USD)
 
13,482

 
13,520

Foreign currency contracts (CAD)
 

 
9,875

Foreign currency contracts (EUR)1
 
1,000,000

 

Commodity contracts (MWhs)
 
854

 
987

———
(1)
During the first quarter of 2018, the Company entered into short and long-term foreign currency forward contracts in relation to the Saeta Yield acquisition. As of March 31, 2018, the Company had outstanding contracts to buy and sell 500 million Euros with varying maturities, to hedge a portion of the foreign currency risk. See Note 4. Acquisitions for discussion regarding the Company’s recently launched Tender Offer for the outstanding shares of Saeta Yield that is expected to close by mid-summer of 2018.


25





The Company elected to present net derivative assets and liabilities on the balance sheet as a right to set-off exists. For interest rate swaps, the Company either nets derivative assets and liabilities on a trade-by-trade basis or nets them in accordance with a master netting arrangement if such an arrangement exists with the counterparties. Foreign currency contracts are netted by currency in accordance with a master netting arrangement. The Company has a master netting arrangement for its commodity contracts for which no amounts were netted as of March 31, 2018 or December 31, 2017.

Gains and losses on derivatives not designated as hedging instruments for the three months ended March 31, 2018 and 2017 consisted of the following:
 
 
Location of (Gain) Loss in the Statements of Operations
 
Three Months Ended March 31,
(In thousands)
2018
 
2017
Interest rate swaps
 
Interest expense, net
 
$
(226
)
 
$
1,374

Foreign currency contracts
 
Loss on foreign currency exchange, net
 
1,226

 
213

Commodity contracts
 
Operating revenues, net
 
(410
)
 
(4,113
)

Gains and losses recognized related to interest rate swaps and commodity contracts designated as hedging instruments for the three months ended March 31, 2018 and 2017 consisted of the following:
 
 
Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships
 
Gain (Loss) Included in the Assessment of Effectiveness Recognized in OCI, net of taxes1
 
Gain (Loss) Excluded from the Assessment of Effectiveness Recognized in OCI Using an Amortization Approach2
 
Location of Amount Reclassified from Accumulated OCI into Income
 
(Gain) Loss Included in the Assessment of Effectiveness Reclassified from Accumulated OCI into Income3
 
(Gain) Loss Excluded from the Assessment of Effectiveness that is Amortized through Earnings2
(In thousands)
 
2018
 
2017
 
2018
 
2017
 
 
2018
 
2017
 
2018
 
2017
Interest rate swaps
 
$
7,875

 
$
(1,619
)
 
$

 
$

 
Interest expense, net
 
$
681

 
$
2,861

 
$

 
$

Commodity contracts
 
(19,102
)
 
15,673

 
735

 

 
Operating revenues, net
 
(1,311
)
 
(3,247
)
 
(332
)
 

Total
 
$
(11,227
)
 
$
14,054

 
$
735

 
$

 
 
 
$
(630
)
 
$
(386
)
 
$
(332
)
 
$

————
(1)
There were no taxes attributed to interest rate swaps during the three months ended March 31, 2018 and 2017. Net of taxes of zero and $5.8 million for commodity contracts during the three months ended March 31, 2018 and 2017, respectively.
(2)
As a result of the adoption of ASU No. 2017-12 effective January 1, 2018 (see Note 2. Summary of Significant Accounting Policies), certain gains and losses were excluded from the assessment of effectiveness that are being amortized through earnings for the three months ended March 31, 2018. No such amounts existed for the three months ended March 31, 2017 prior to the adoption of ASU No. 2017-12.
(3)
There were no taxes attributed to derivatives designated as hedging instruments during the three months ended March 31, 2018 and 2017.

As discussed in Note 2. Summary of Significant Accounting Policies, the Company adopted ASU No. 2017-12 as of January 1, 2018 and recognized a cumulative-effect adjustment of $4.2 million, net of tax of $1.6 million, representing a decrease in beginning accumulated deficit and accumulated OCI, which is reflected within cumulative-effect adjustment in the unaudited condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2018.
    
As of March 31, 2018 and December 31, 2017, the Company had posted letters of credit in the amount of $15.0 million, as collateral related to certain commodity contracts. Certain derivative contracts contain provisions providing the counterparties a lien on specific assets as collateral. There was no cash collateral received or pledged as of March 31, 2018 and December 31, 2017 related to the Company’s derivative transactions.


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Derivatives Designated as Hedging Instruments

Interest Rate Swaps

The Company has interest rate swap agreements to hedge variable rate non-recourse debt. These interest rate swaps were designated as hedging instruments and qualify for hedge accounting. Under the interest rate swap agreements, the renewable energy facilities pay a fixed rate and the counterparties to the agreements pay a variable interest rate. The amounts deferred in accumulated OCI and reclassified into earnings during the three months ended March 31, 2018 and 2017 related to these interest rate swaps are provided in the tables above. The loss expected to be reclassified into earnings over the next twelve months is approximately $0.4 million. The maximum term of outstanding interest rate swaps designated as hedging instruments is 16 years.

Commodity Contracts

The Company has long-dated physically delivered commodity contracts that hedge variability in cash flows associated with the sales of power from certain renewable energy facilities located in Texas. These commodity contracts qualify for hedge accounting and are designated as cash flow hedges. Accordingly, the effective portions of the change in fair value of these derivatives are reported in accumulated OCI and subsequently reclassified to earnings in the periods when the hedged transactions affect earnings. Prior to adoption of ASU 2017-12, any ineffective portions of the derivatives’ change in fair value were recognized in earnings. The amounts deferred in accumulated OCI and reclassified into earnings during the three months ended March 31, 2018 and 2017 related to these commodity contracts are provided in the tables above. The gain expected to be reclassified into earnings over the next twelve months is approximately $8.1 million. The maximum term of outstanding commodity contracts designated as hedges is 12 years.

Derivatives Not Designated as Hedges

Interest Rate Swaps

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

Foreign Currency Contracts

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

Commodity Contracts

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

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of assets and liabilities are determined using either unadjusted quoted prices in active markets (Level 1) or pricing inputs that are observable (Level 2) whenever that information is available and using unobservable inputs (Level 3) to estimate fair value only when relevant observable inputs are not available. The Company uses valuation techniques that


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

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

Recurring Fair Value Measurements

The following table summarizes the financial instruments measured at fair value on a recurring basis classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation in the unaudited condensed consolidated balance sheets:
(In thousands)
As of March 31, 2018
 
As of December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
9,861

 
$

 
$
9,861

 
$

 
$
4,686

 
$

 
$
4,686

Commodity contracts

 
25,358

 
60,540

 
85,898

 

 
27,396

 
80,268

 
107,664

Foreign currency contracts

 

 

 

 

 

 

 

Total derivative assets
$

 
$
35,219

 
$
60,540

 
$
95,759

 
$

 
$
32,082

 
$
80,268

 
$
112,350

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps