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EX-32 - EXHIBIT 32 - TerraForm Power, Inc.terraform-093018xexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - TerraForm Power, Inc.terraform-093018xexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - TerraForm Power, Inc.terraform-093018xexhibit311.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________________________________________
FORM 10-Q
 _____________________________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
 ______________________________________________________________
image0a18.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.)
200 Liberty Street, 14th Floor, New York, New York
 
10281
(Address of principal executive offices)
 
(Zip Code)
646-992-2400
(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 every Interactive Data File required to be submitted 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 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
 
Smaller reporting company
 
o
Emerging growth company
 
o
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o    No  x
As of October 31, 2018, there were 209,141,720 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,” “opportunities,” “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 control 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;
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 our ability to successfully integrate the operations, technologies and personnel of Saeta Yield S.A.U. (“Saeta”) and to establish appropriate accounting controls in respect of Saeta;
the regulated rate of return of renewable energy facilities in Spain, including Saeta’s wind and solar assets, a reduction of which could have a material negative impact on our results of operations;
our ability to successfully identify, evaluate and consummate acquisitions;
our ability to integrate the projects we acquire from third parties, including Saeta, and our ability to realize the anticipated benefits from such acquisitions; and
our ability to implement and realize the benefit of our cost and performance enhancement initiatives, including the long-term service agreements with an affiliate of General Electric.

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 our Annual Report on Form 10-K for the year ended December 31, 2017 and in subsequent Quarterly Reports on Form 10-Q, as well as additional factors we may describe from time to time in our 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.



3



PART I - Financial Information

Item 1. Financial Statements.

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


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Operating revenues, net
$
246,042

 
$
153,430

 
$
553,477

 
$
474,932

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of operations
59,027

 
41,859

 
146,155

 
108,402

Cost of operations - affiliate

 
1,199

 

 
10,224

General and administrative expenses
21,334

 
21,664

 
65,483

 
99,644

General and administrative expenses - affiliate
3,432

 
2,192

 
10,929

 
6,893

Acquisition-related costs
1,655

 

 
7,612

 

Acquisition-related costs - affiliate
335

 

 
6,965

 

Impairment of renewable energy facilities

 

 
15,240

 
1,429

Depreciation, accretion and amortization expense
103,593

 
61,830

 
239,177

 
186,039

Total operating costs and expenses
189,376

 
128,744

 
491,561

 
412,631

Operating income
56,666

 
24,686

 
61,916

 
62,301

Other expenses (income):
 
 
 
 
 
 
 
Interest expense, net
72,416

 
70,232

 
176,862

 
206,749

Gain on sale of renewable energy facilities

 

 

 
(37,116
)
Gain on foreign currency exchange, net
(3,070
)
 
(1,078
)
 
(4,257
)
 
(5,695
)
Other expenses (income), net
358

 
(7,015
)
 
2,870

 
(4,882
)
Total other expenses, net
69,704

 
62,139

 
175,475

 
159,056

Loss before income tax expense (benefit)
(13,038
)
 
(37,453
)
 
(113,559
)
 
(96,755
)
Income tax expense (benefit)
6,013

 
(1,099
)
 
9,417

 
(2,256
)
Net loss
(19,051
)
 
(36,354
)
 
(122,976
)
 
(94,499
)
Less: Net income attributable to redeemable non-controlling interests
12,443

 
4,895

 
15,101

 
10,264

Less: Net income (loss) attributable to non-controlling interests
2,096

 
(14,949
)
 
(165,946
)
 
(57,272
)
Net (loss) income attributable to Class A common stockholders
$
(33,590
)
 
$
(26,300
)
 
$
27,869

 
$
(47,491
)
 
 
 
 
 
 
 
 
Weighted average number of shares:
 
 
 
 
 
 
 
Class A common stock - Basic
209,142

 
92,352

 
173,173

 
92,228

Class A common stock - Diluted
209,142

 
92,352

 
173,186

 
92,228

 
 
 
 
 
 
 
 
(Loss) earnings per share:
 
 
 
 
 
 
 
Class A common stock - Basic and diluted
$
(0.16
)
 
$
(0.31
)
 
$
0.16

 
$
(0.59
)
 
 
 
 
 
 
 
 
Dividends declared per share:
 
 
 
 
 
 
 
Class A common stock
$
0.19

 
$

 
$
0.57

 
$



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 September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Net loss
 
$
(19,051
)
 
$
(36,354
)
 
$
(122,976
)
 
$
(94,499
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
Net unrealized gain (loss) arising during the period
 
446

 
6,535

 
(8,229
)
 
12,136

Reclassification of net realized loss into earnings1
 

 

 

 
14,741

Hedging activities:
 
 
 
 
 
 
 
 
Net unrealized gain arising during the period
 
10,621

 
17,338

 
12,528

 
27,960

Reclassification of net realized (gain) loss into earnings
 
(5,832
)
 
94

 
(6,755
)
 
(527
)
Other comprehensive income (loss), net of tax
 
5,235

 
23,967

 
(2,456
)
 
54,310

Total comprehensive (loss)
 
(13,816
)
 
(12,387
)
 
(125,432
)
 
(40,189
)
Less comprehensive income attributable to non-controlling interests:
 
 
 
 
 
 
 
 
Net income attributable to redeemable non-controlling interests
 
12,443

 
4,895

 
15,101

 
10,264

Net income (loss) attributable to non-controlling interests
 
2,096

 
(14,949
)
 
(165,946
)
 
(57,272
)
Foreign currency translation adjustments
 

 
1,967

 

 
1,250

Hedging activities
 
(1,801
)
 
6,799

 
(3,038
)
 
18,638

Comprehensive income (loss) attributable to non-controlling interests
 
12,738

 
(1,288
)
 
(153,883
)
 
(27,120
)
Comprehensive (loss) income attributable to Class A common stockholders
 
$
(26,554
)
 
$
(11,099
)
 
$
28,451

 
$
(13,069
)
———
(1)
Represents reclassification of the accumulated foreign currency translation loss for substantially all of the Company’s portfolio of solar power plants located in the United Kingdom, as the Company’s sale of these facilities closed in the second quarter of 2017 as discussed in Note 4. Acquisitions and Dispositions. The pre-tax amount of $23.6 million was recognized within gain on sale of renewable energy facilities in the unaudited condensed consolidated statements of operations for the nine months ended September 30, 2017.



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)


 
September 30,
2018
 
December 31, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
349,563

 
$
128,087

Restricted cash
28,095

 
54,006

Accounts receivable, net
178,094

 
89,680

Prepaid expenses and other current assets
71,935

 
65,393

Due from affiliate
350

 
4,370

Total current assets
628,037

 
341,536

 
 
 
 
Renewable energy facilities, net, including consolidated variable interest entities of $3,119,285 and $3,273,848 in 2018 and 2017, respectively
6,555,836

 
4,801,925

Intangible assets, net, including consolidated variable interest entities of $761,299 and $823,629 in 2018 and 2017, respectively
2,000,893

 
1,077,786

Goodwill
113,701

 

Restricted cash
132,337

 
42,694

Other assets
145,173

 
123,080

Total assets
$
9,575,977

 
$
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 $59,210 and $84,691 in 2018 and 2017, respectively
$
454,351

 
$
403,488

Accounts payable, accrued expenses and other current liabilities, including consolidated variable interest entities of $37,862 and $34,199 in 2018 and 2017, respectively
207,185

 
88,538

Deferred revenue
1,720

 
17,859

Due to affiliates
10,921

 
3,968

Total current liabilities
674,177

 
513,853

 
 
 
 
Long-term debt and financing lease obligations, less current portion, including consolidated variable interest entities of $908,962 and $833,388 in 2018 and 2017, respectively
5,499,731

 
3,195,312

Deferred revenue, less current portion
12,444

 
38,074

Deferred income taxes
204,157

 
24,972

Asset retirement obligations, including consolidated variable interest entities of $98,955 and $97,467 in 2018 and 2017, respectively
173,202

 
154,515

Other long-term liabilities
155,278

 
37,923

Total liabilities
6,718,989

 
3,964,649

 
 
 
 
Redeemable non-controlling interests
43,900

 
34,660

Stockholders' equity:
 
 
 
Class A common stock, $0.01 par value per share, 1,200,000,000 shares authorized, 209,642,140 and 148,586,447 shares issued in 2018 and 2017, respectively, and 209,141,720 and 148,086,027 shares outstanding in 2018 and 2017, respectively
2,096

 
1,486

Additional paid-in capital
2,427,612

 
1,872,125

Accumulated deficit
(334,757
)
 
(387,204
)
Accumulated other comprehensive income
44,436

 
48,018

Treasury stock, 500,420 shares in 2018 and 2017
(6,712
)
 
(6,712
)
Total TerraForm Power, Inc. stockholders' equity
2,132,675

 
1,527,713

Non-controlling interests
680,413

 
859,999

Total stockholders' equity
2,813,088

 
2,387,712

Total liabilities, redeemable non-controlling interests and stockholders' equity
$
9,575,977

 
$
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)


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
$
1,872,125

 
$
(387,204
)
 
$
48,018

 
(500
)
 
$
(6,712
)
 
$
1,527,713


$
1,057,301

 
$
(198,196
)
 
$
894

 
$
859,999

 
$
2,387,712

Cumulative-effect adjustment1

 

 

 
24,578

 
(4,164
)
 

 

 
20,414

 

 
(308
)
 

 
(308
)
 
20,106

Issuances of Class A common stock to affiliates
61,056

 
610

 
650,271

 

 

 

 

 
650,881

 

 

 

 

 
650,881

Stock-based compensation

 

 
161

 

 

 

 

 
161

 

 

 

 

 
161

Net income (loss)

 

 

 
27,869

 

 

 

 
27,869

 

 
(165,946
)
 

 
(165,946
)
 
(138,077
)
Dividends

 

 
(95,625
)
 

 

 

 

 
(95,625
)
 

 

 

 

 
(95,625
)
Other comprehensive income (loss)

 

 

 

 
582

 

 

 
582

 

 

 
(3,038
)
 
(3,038
)
 
(2,456
)
Contributions from non-controlling interests in renewable energy facilities

 

 

 

 

 

 

 

 
7,685

 

 

 
7,685

 
7,685

Distributions to non-controlling interests in renewable energy facilities

 

 

 

 

 

 

 

 
(17,888
)
 

 

 
(17,888
)
 
(17,888
)
Purchase of redeemable non-controlling interests in renewable energy facilities

 


(3,065
)
 

 

 

 

 
(3,065
)
 

 

 

 

 
(3,065
)
Other

 

 
3,745

 

 

 

 

 
3,745

 
409

 
(500
)
 

 
(91
)
 
3,654

Balance as of September 30, 2018
209,642

 
$
2,096

 
$
2,427,612

 
$
(334,757
)
 
$
44,436

 
(500
)
 
$
(6,712
)
 
$
2,132,675

 
$
1,047,507

 
$
(364,950
)
 
$
(2,144
)
 
$
680,413

 
$
2,813,088

———
(1)
See Note 2. Summary of Significant Accounting Policies for discussion regarding the Company’s adoption of Accounting Standards Update (“ASU”) No. 2014-09, ASU No. 2016-08 and ASU No. 2017-12 as of January 1, 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)


 
Nine Months Ended September 30,
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(122,976
)
 
$
(94,499
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation, accretion and amortization expense
239,177

 
186,039

Amortization of favorable and unfavorable rate revenue contracts, net
29,477

 
29,459

Gain on sale of renewable energy facilities

 
(37,116
)
Impairment of renewable energy facilities
15,240

 
1,429

Amortization of deferred financing costs and debt discounts
7,969

 
19,729

Unrealized (gain) loss on interest rate swaps
(11,688
)
 
2,425

Unrealized gain on commodity contract derivatives, net
(3,845
)
 
(1,244
)
Recognition of deferred revenue
(1,344
)
 
(11,510
)
Stock-based compensation expense
161

 
7,049

Loss on extinguishment of debt, net
1,480

 
2,518

Loss on disposal of property, plant and equipment
6,764

 

Unrealized gain on foreign currency exchange, net
(9,643
)
 
(5,275
)
Deferred taxes
4,888

 
7,892

Other, net
453

 
5,978

Changes in assets and liabilities:
 
 
 
Accounts receivable
(18,757
)
 
(18,860
)
Prepaid expenses and other current assets
9,154

 
(4,997
)
Accounts payable, accrued expenses and other current liabilities
(13,002
)
 
(758
)
Due to affiliates
4,158

 
199

Other non-current assets and liabilities, net
13,361

 
3,907

Net cash provided by operating activities
151,027

 
92,365

Cash flows from investing activities:
 
 
 
Capital expenditures
(15,320
)
 
(7,472
)
Proceeds from sale of renewable energy facilities, net of cash and restricted cash disposed

 
183,235

Proceeds from energy state rebate and reimbursable interconnection costs
8,224

 
23,621

Proceeds from the settlement of foreign currency contracts
22,429

 

Acquisition of Saeta business, net of cash and restricted cash acquired
(886,104
)
 

Acquisition of renewable energy facilities from third parties, net of cash and restricted cash acquired
(4,105
)
 

Net cash (used in) provided by investing activities
(874,876
)
 
199,384


See accompanying notes to unaudited condensed consolidated financial statements.

8



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

 
Nine Months Ended September 30,
2018
 
2017
Cash flows from financing activities:
 
 
 
Proceeds from issuance of Class A common stock to affiliates
650,000

 

Proceeds from the Sponsor Line - affiliate
86,000

 

Repayments of the Sponsor Line - affiliate
(86,000
)
 

Revolving credit facility draws
619,000

 

Revolving credit facility repayments
(200,466
)
 
(275,000
)
Term Loan principal payments
(2,625
)
 

Borrowings of non-recourse long-term debt
236,381

 
79,835

Principal payments and prepayments on non-recourse long-term debt
(180,124
)
 
(199,481
)
Debt financing fees
(7,422
)
 
(10,228
)
Sale of membership interests and contributions from non-controlling interests in renewable energy facilities
7,685

 
6,935

Purchase of membership interests and distributions to non-controlling
interests in renewable energy facilities
(21,792
)
 
(23,017
)
Due to/from affiliates, net
4,803

 
(3,097
)
Net SunEdison investment

 
7,436

Payment of dividends
(95,627
)
 

Recovery of related party short swing profit
2,994

 

Other financing activities

 
(1,030
)
Net cash provided by (used in) financing activities
1,012,807

 
(417,647
)
Net increase in cash, cash equivalents and restricted cash
288,958

 
(125,898
)
Net change in cash, cash equivalents and restricted cash classified within assets held for sale

 
54,806

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(3,750
)
 
3,264

Cash, cash equivalents and restricted cash at beginning of period
224,787

 
682,837

Cash, cash equivalents and restricted cash at end of period
$
509,995

 
$
615,009

Supplemental Disclosures:
 
 
 
Cash paid for interest
$
170,549

 
$
182,021

Cash paid for income taxes
667

 


See accompanying notes to unaudited condensed consolidated financial statements.

9



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


1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

TerraForm Power, Inc. (“TerraForm Power” and, together with its subsidiaries, the “Company”) 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 produced 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 Asset Management Inc. (“Brookfield”) and has an objective to acquire operating solar and wind assets in North America and Western Europe.
    
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, with TerraForm Power continuing as the surviving corporation (the “Merger”). Prior to the consummation of the Merger, TerraForm Power and its subsidiaries 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, held 51% of the voting securities of TerraForm Power immediately following the Merger consummation. 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. As further discussed in Note 12. Stockholders’ Equity, on June 11, 2018, Orion Holdings and Brookfield BRP Holdings (Canada) Inc. (“BEP”), an Ontario Corporation and an affiliate of Brookfield, collectively purchased in a private placement a total of 60,975,609 shares of TerraForm Power’s Class A common stock for a price per share of $10.66, representing total consideration of approximately $650.0 million. As a result of this private placement, affiliates of Brookfield held approximately 65% of TerraForm Power’s Class A common stock as of September 30, 2018.

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 accounting principles generally accepted in the United States of America (“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 September 30, 2018, results of operations and comprehensive (loss) income for the three and nine months ended September 30, 2018 and 2017 and cash flows for the nine months ended September 30, 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.



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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 nine months ended September 30, 2018.
(In thousands)
 
September 30,
2018
 
December 31,
2017
Cash and cash equivalents
 
$
349,563

 
$
128,087

Restricted cash - current
 
28,095

 
54,006

Restricted cash - non-current
 
132,337

 
42,694

Cash, cash equivalents and restricted cash shown in the unaudited condensed consolidated statement of cash flows
 
$
509,995

 
$
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 nine months ended September 30, 2018 and for the year ended December 31, 2017. As a result, the Company reclassified $11.7 million and $18.8 million of non-current restricted cash to current as of September 30, 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 September 30, 2018, and December 31, 2017, $2.7 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. For the nine months ended September 30, 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.

Restructuring

In connection with the consummation of the Merger and the 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 was substantially completed early in the third quarter of 2018. The Company recognized $0.5 million and $2.7 million of additional severance and transition bonus costs during the three and nine months ended September 30, 2018, respectively, within general and administrative expenses in the unaudited condensed consolidated statements of operations. The Company made $2.7 million and $4.9 million of payments related to this restructuring during the three and nine months ended September 30, 2018, respectively. The balance of the accrued severance and transition bonuses was $0.5 million as of September 30, 2018.



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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 Accounting Standards Codification (“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 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 nine months ended September 30, 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 nine months 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 nine months ended September 30, 2018. The impact on the Company’s results of operations for the three and nine months ended September 30, 2018 resulted in a decrease in non-cash deferred revenue recognition of $5.0 million and $10.1 million, respectively, and is expected to result in a decrease in non-cash deferred revenue recognition of approximately $6.2 million for the remainder of 2018.


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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. Based on the Company’s evaluation of the new guidance, the Company determined that the acquisition of the tendered shares of Saeta on June 12, 2018 qualifies to be accounted for as an acquisition of a business and the Company’s acquisition of a 6 megawatt (“MW”) portfolio of operating solar distributed generation assets located in California and New Jersey on June 29, 2018 should be accounted for as an acquisition of assets. See Note 4. Acquisitions and Dispositions for further discussion of the Saeta acquisition.

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 change the terms or conditions of any unvested share-based payment awards outstanding during the nine months ended September 30, 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


13




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 (“AOCI”);
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 gains or losses recorded in AOCI 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 gains or losses recorded in AOCI 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 AOCI, which is reflected within cumulative-effect adjustment in the unaudited condensed consolidated statement of stockholders’ equity for the nine months ended September 30, 2018.

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 adoption of ASU No. 2018-03 as of July 1, 2018 did not have an impact on the Company’s consolidated financial statements.

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.

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 guidance 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 July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which amended the standard to give entities another option for transition. The additional transition method allows entities to initially apply the requirements of the standard in the period of adoption (January 1, 2019). The Company is assessing this transition option. 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


14




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. The Company is currently evaluating the effect of the new guidance on its consolidated financial statements.
    
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income to help entities address certain stranded income tax effects in AOCI 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 AOCI 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 AOCI. 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 August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework —Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes some disclosure requirements, modifies others, and adds some new disclosure requirements. The guidance is effective January 1, 2020, with early adoption permitted. The Company is currently evaluating the effect of the new guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU amends the definition of a hosting arrangement and requires a customer in a cloud computing arrangement that is a service contract to follow the internal use software guidance in ASC 350-402 to determine which implementation costs to capitalize as assets. Capitalized implementation costs are amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The guidance is effective January 1, 2020, with early adoption permitted. The Company is currently evaluating the effect of the new guidance on its consolidated financial statements.
    
In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. This ASU expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting by adding the SOFR as a permissible U.S. benchmark rate. The new amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect of the new guidance on its consolidated financial statements for any future application of hedge accounting involving SOFR as a benchmark interest rate.

In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The amendments in this ASU require reporting entities to consider indirect interests held through related parties under common control for determining whether fees paid to decision makers and service provider are variable interests. These indirect interests should be considered on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required in U.S. GAAP). The guidance is effective January 1, 2020, with early adoption permitted. Entities are required to apply the amendments in this guidance retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The Company is currently evaluating the effect of the new guidance on its consolidated financial statements.


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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 and nine months ended September 30, 2018, and provide a reconciliation of the adoption impact of Topic 606 on the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2018, and unaudited condensed consolidated balance sheet as of September 30, 2018. There was no net impact on net cash provided by operating activities in the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2018 resulting from the adoption of Topic 606.

Topic 606 Adoption Impact on Unaudited Condensed Consolidated Statements of Operations
 
 
Three Months Ended September 30, 2018
 
 
As Reported
 
Adjustments
 
Amounts excluding Topic 606 Adoption
(In thousands)
 
Solar
 
Wind
 
Regulated Solar and Wind
 
Total
 
REC Sales
 
ITC Sales
 
PPA rental income
 
$
66,982

 
$
35,084

 
$

 
$
102,066

 
$

 
$

 
$
102,066

Commodity derivatives
 

 
7,469

 

 
7,469

 

 

 
7,469

PPA and market energy revenue
 
14,353

 
18,846

 
32,594

 
65,793

 

 

 
65,793

Capacity revenue from remuneration programs1
 

 

 
47,356

 
47,356

 

 

 
47,356

Amortization of favorable and unfavorable rate revenue contracts, net
 
(2,132
)
 
(7,779
)
 

 
(9,911
)
 

 

 
(9,911
)
Energy revenue
 
79,203

 
53,620

 
79,950

 
212,773

 

 

 
212,773

Incentive revenue
 
15,680

 
3,343

 
14,246

 
33,269

 
2,318

 
4,958

 
40,545

Operating revenues, net
 
94,883

 
56,963

 
94,196

 
246,042

 
2,318

 
4,958

 
253,318

Operating costs and expenses
 
 
 
 
 
 
 
189,376

 

 

 
189,376

Operating income
 
 
 
 
 
 
 
56,666

 
2,318

 
4,958

 
63,942

Other expenses, net
 
 
 
 
 
 
 
69,704

 

 

 
69,704

(Loss) income before income tax expense
 
 
 
 
 
 
 
(13,038
)
 
2,318

 
4,958

 
(5,762
)
Income tax expense
 
 
 
 
 
 
 
6,013

 

 

 
6,013

Net loss
 
 
 
 
 
 
 
$
(19,051
)
 
$
2,318

 
$
4,958

 
$
(11,775
)


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Nine Months Ended September 30, 2018
 
 
As Reported
 
Adjustments
 
Amounts excluding Topic 606 Adoption
(In thousands)
 
Solar
 
Wind
 
Regulated Solar and Wind
 
Total
 
REC Sales
 
ITC Sales
 
PPA rental income
 
$
159,116

 
$
138,396

 
$

 
$
297,512

 
$

 
$

 
$
297,512

Commodity derivatives
 

 
39,917

 

 
39,917

 

 

 
39,917

PPA and market energy revenue
 
34,318

 
31,897

 
38,909

 
105,124

 

 

 
105,124

Capacity revenue from remuneration programs1
 

 

 
59,327

 
59,327

 

 

 
59,327

Amortization of favorable and unfavorable rate revenue contracts, net
 
(6,075
)
 
(23,403
)
 

 
(29,478
)
 

 

 
(29,478
)
Energy revenue
 
187,359

 
186,807

 
98,236

 
472,402

 

 

 
472,402

Incentive revenue
 
50,568

 
13,261

 
17,246

 
81,075

 
5,344

 
10,074

 
96,493

Operating revenues, net
 
237,927

 
200,068

 
115,482

 
553,477

 
5,344

 
10,074

 
568,895

Operating costs and expenses
 
 
 
 
 
 
 
491,561

 

 

 
491,561

Operating income
 
 
 
 
 
 
 
61,916

 
5,344

 
10,074

 
77,334

Other expenses, net
 
 
 
 
 
 
 
175,475

 

 

 
175,475

Loss before income tax expense
 
 
 
 
 
 
 
(113,559
)
 
5,344

 
10,074

 
(98,141
)
Income tax expense
 
 
 
 
 
 
 
9,417

 

 

 
9,417

Net (loss) income
 
 
 
 
 
 
 
$
(122,976
)
 
$
5,344

 
$
10,074

 
$
(107,558
)
———
(1)
Represents the remuneration related to the Company’s investments associated with its renewable energy facilities in Spain, as discussed below in “Regulated solar and wind revenue”.

Topic 606 Adoption Impact on Unaudited Condensed Consolidated Balance Sheet
 
 
As of September 30, 2018
 
 
As
Reported
 
Adjustments
 
Amounts excluding Topic 606 Adoption
(In thousands)
 
 
REC Sales
 
ITC Sales
 
Accounts receivable, net
 
$
178,094

 
$
30,619

 
$

 
$
208,713

Other current assets
 
449,943

 

 

 
449,943

Total current assets
 
628,037

 
30,619

 

 
658,656

Non-current assets
 
8,947,940

 

 

 
8,947,940

Total assets
 
$
9,575,977

 
$
30,619

 
$

 
$
9,606,596

 
 
 
 
 
 
 
 
 
Deferred revenue
 
$
1,720

 
$

 
$
16,310

 
$
18,030

Other current liabilities
 
672,457

 

 

 
672,457

Total current liabilities
 
674,177

 

 
16,310

 
690,487

Deferred revenue, less current portion
 
12,444

 

 
14,513

 
26,957

Other non-current liabilities
 
6,032,368

 

 

 
6,032,368

Total liabilities
 
6,718,989

 

 
30,823

 
6,749,812

Redeemable non-controlling interests and total stockholders’ equity
 
2,856,988

 
30,619

 
(30,823
)
 
2,856,784

Total liabilities, redeemable non-controlling interests and stockholders’ equity
 
$
9,575,977

 
$
30,619

 
$

 
$
9,606,596


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


17




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.

Solar and wind 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 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 standalone and bundled PPA contracts.

For the three and nine months ended September 30, 2018, the Company’s energy revenue from PPA contracts with solar and wind customers was $33.2 million and $66.2 million, respectively, which does not include the market energy sales from the regulated solar and wind segment discussed below. As of September 30, 2018, the Company’s receivable balances related to PPA contracts with solar and wind customers was approximately $15.2 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.

Regulated solar and wind revenue

Regulated solar and wind includes revenue generated by Saeta’s solar and wind operations in Spain, which are subject to regulations applicable to companies that generate production from renewable sources for facilities located in Spain. While Saeta’s Spanish operations are regulated by the Spanish regulator, the Company has determined that the Spanish entities do not meet the criteria of a rate regulated entity under ASC 980 Regulated Operations, since the rates established by the Spanish regulator are not designed to recover the entity’s costs of providing its energy generation services. Accordingly, the Company applied Topic 606 to recognize revenue for these customer contract arrangements. The Company has distinct performance
obligations to deliver electricity, capacity, and incentives which are discussed below.

The Company has a performance obligation to deliver electricity and these sales are invoiced monthly at the wholesale market price (subject to adjustments due to regulatory price bands that reduce market risk). The Company transfers control of the electricity over time and the customer receives and consumes the benefit simultaneously. Accordingly, the Company applied


18




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 electricity sales.

The Company has a stand-ready performance obligation to deliver capacity in the Spanish electricity market in which these renewable energy facilities are located. Proceeds received by the Company from the customer in exchange for capacity are determined by a remuneration on an investment (“Ri”) per unit of installed capacity that is determined by Spanish regulators. The Company satisfies its performance obligation for capacity under a time-based measure of progress and recognizes revenue by allocating the total annual consideration evenly to each month of service.

For the Company’s Spanish solar renewable energy facilities, the Company has identified a performance obligation linked to an incentive that is distinct from the electricity and capacity deliveries discussed above. For solar technologies under the Spanish market, the customer makes an operating payment (“Ro”) per MWh which is calculated based on the difference of a standard cost and an expected market price, both, determined by the Spanish regulator. The customer is invoiced monthly equal to the volume of energy produced multiplied by the regulated rate. The performance obligation is satisfied when the Company generates electricity from the solar renewable facility. Accordingly, the Company applied the practical expedient in Topic 606 and recognizes revenue based on the amount invoiced each month.

Following the acquisition of Saeta, the Company is now exposed to some concentration of credit risk given that its large Spanish portfolio has only two principal offtake contract counterparties. However, this concentration of credit risk is mitigated by the investment grade credit ratings of these offtake contract counterparties.

For the three and nine months ended September 30, 2018, regulated solar and wind revenue with customers was $94.2 million and $115.5 million, respectively. As of September 30, 2018, the Company’s receivable balance with customers from regulated solar and wind revenue was $93.8 million. The Company does not have any other significant contract asset or liability balances related to regulated solar and wind revenue.

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.

Solar and wind 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 $2.3 million and $5.3 million during the three and nine months ended September 30, 2018, respectively. Incentive revenues yet to be earned for fixed price incentive contracts are expected to be $71.3 million and recognized between 2018 and 2031. 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 and nine months ended September 30, 2018, the Company’s incentive revenue from facility-linked contracts with customers was $8.8 million and $23.2 million respectively. Revenue accruals for facility linked incentive contracts within accounts receivable, net were $6.4 million as of September 30, 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


19




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 $5.0 million and $10.1 million in non-cash deferred revenue within operating revenues, net for the three and nine months ended September 30, 2018, respectively. The remaining deferred revenue balance in the unaudited condensed consolidated balance sheet as of September 30, 2018, consisted of upfront government incentives of $8.9 million and contract liabilities of $5.2 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 and nine months ended September 30, 2018 related to contract liabilities was $0.3 million and $1.0 million, respectively.

4. ACQUISITIONS AND DISPOSITIONS

Acquisition of Saeta

On February 7, 2018, the Company announced that it intended to launch a voluntary tender offer (the “Tender Offer”) to acquire 100% of the outstanding shares of Saeta, a Spanish renewable power company with 1,028 MW of wind and solar facilities (approximately 250 MW of solar and 778 MW of wind) located primarily in Spain. The Tender Offer was for €12.20 in cash per share of Saeta. On June 8, 2018, the Company announced that Spain’s National Securities Market Commission confirmed an over 95% acceptance of shares of Saeta in the Tender Offer (the “Tendered Shares”). On June 12, 2018, the Company completed the acquisition of the Tendered Shares for total aggregate consideration of $1.12 billion and $1.91 billion of project-level debt assumed. With 95.28% of the shares of Saeta acquired, the Company pursued a statutory squeeze out procedure under Spanish law to procure the remaining approximately 4.72% of the shares of Saeta for $54.6 million.

The Company funded the $1.12 billion purchase price of the Tendered Shares with $650.0 million of proceeds from the private placement of its Class A common stock to Orion Holdings and BEP as discussed in Note 1. Basis of Presentation and Note 12. Stockholders’ Equity, along with approximately $471 million from its existing liquidity, including (i) the proceeds of a $30.0 million draw on its Sponsor Line (as defined in Note 8. Long-term Debt), (ii) a $359.0 million draw on the Company’s Revolver (as defined in Note 8. Long-term Debt), and (iii) approximately $82 million of cash on hand. The Company funded the purchase of the remaining approximately 4.72% non-controlling interest in Saeta using $54.6 million of the total proceeds from an additional draw on its Sponsor Line.


20





As discussed in Note 2. Summary of Significant Accounting Policies, the Company accounted for the acquisition of Saeta under the acquisition method of accounting for business combinations. The final accounting for the Saeta acquisition has not been completed because the evaluation necessary to assess the fair values of acquired assets and assumed liabilities is still in process. The provisional amounts for this acquisition are subject to revision until these evaluations are completed. The preliminary allocation of the acquisition-date fair values of assets, liabilities and redeemable non-controlling interests pertaining to this business combination as of September 30, 2018, were as follows:
(In thousands)
 
Saeta
Renewable energy facilities in service
 
$
1,988,993

Accounts receivable
 
91,343

Intangible assets
 
993,274

Goodwill
 
115,084

Other assets
 
43,402

Total assets acquired
 
3,232,096

Accounts payable, accrued expenses and other current liabilities
 
93,032

Long-term debt, including current portion
 
1,906,831

Deferred income taxes
 
174,174

Asset retirement obligations
 
11,454

Derivative liabilities1
 
137,002

Other long-term liabilities
 
23,002

Total liabilities assumed
 
2,345,495

Redeemable non-controlling interests2
 
55,117

Purchase price, net of cash and restricted cash acquired3
 
$
831,484

———
(1)
Derivative liabilities are included within other long-term liabilities in the unaudited condensed consolidated balance sheets.
(2)
The fair value of the non-controlling interest was determined using a market approach using a quoted price for the instrument. As discussed above, the Company acquired the remaining shares of Saeta pursuant to a statutory squeeze out procedure under Spanish law, which closed on July 2, 2018. The quoted price for the purchase of the non-controlling interest is the best indicator of fair value and was supported by a discounted cash flow technique.
(3)
The Company acquired cash and cash equivalents of $187.2 million and restricted cash of $95.1 million as of the acquisition date.

The acquired non-financial assets primarily represent estimates of the fair value of acquired renewable energy facilities and intangible assets from concession and license agreements using the cost and income approach. Key inputs used to estimate fair value included forecasted power pricing, operational data, asset useful lives, and a discount rate factor reflecting current market conditions at the time of the acquisition. These significant inputs are not observable in the market and thus represent Level 3 measurements (as defined in Note 11. Fair Value of Financial Instruments). Refer below for additional disclosures related to the acquired finite-lived intangible assets.
    
The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. The assignment of goodwill to the reporting units has not been completed. The goodwill balance is not deductible for income tax purposes.

The results of operations of Saeta are included in the Company’s consolidated results since the date of acquisition. The operating revenues and net income of Saeta reflected in the unaudited condensed consolidated statements of operations for the three months ended September 30, 2018 were $107.9 million and $21.8 million, respectively, and for the nine months ended September 30, 2018 were $132.5 million and $33.4 million, respectively.

Intangibles at Acquisition Date
    
The following table summarizes the estimated fair value and weighted average amortization period of acquired intangible assets as of the acquisition date for Saeta. The Company attributed intangible asset value to concessions and license agreements in-place from solar and wind facilities. These intangible assets are amortized on a straight-line basis over the estimated remaining useful life of the facility from the Company’s acquisition date.


21




 
 
Saeta
 
 
Fair Value (In thousands)
 
Weighted Average Amortization Period (In years)1
Intangible assets - concessions and licenses
 
$
993,274

 
17 years
———
(1)
For purposes of this disclosure, the weighted average amortization period is determined based on a weighting of the individual intangible fair values against the total fair value for each major intangible asset and liability class.

Unaudited Pro Forma Supplementary Data

The unaudited pro forma supplementary data presented in the table below gives effect to the Saeta acquisition, as if the transaction had occurred on January 1, 2017. The pro forma net loss includes interest expense related to incremental borrowings used to finance the transaction and adjustments to depreciation and amortization expense for the valuation of renewable energy facilities and intangible assets. The pro forma net loss for the three and nine months ended September 30, 2018, excludes the impact of acquisition related costs disclosed below. The unaudited pro forma supplementary data is provided for informational purposes only and should not be construed to be indicative of the Company’s results of operations had the acquisition been consummated on the date assumed or of the Company’s results of operations for any future date.
 
 
Nine Months Ended September 30,
(In thousands)
 
2018
 
2017
Total operating revenues, net
 
$
740,066

 
$
749,814

Net loss
 
(108,314
)
 
(82,599
)

Acquisition Costs

Acquisition costs incurred by the Company for the three and nine months ended September 30, 2018, were $2.0 million and $14.6 million, respectively. Costs related to affiliates included in these balances were $0.3 million and $7.0 million, respectively. There were no acquisition costs incurred by the Company for the three and nine months ended 2017. These costs are reflected as acquisition-related costs and acquisition-related costs - affiliate (see Note 15. Related Parties) in the unaudited condensed consolidated statements of operations and are excluded from the unaudited pro forma net loss amount disclosed above.

U.K. Portfolio Sale

On May 11, 2017, the Company announced that TerraForm Power Operating, LLC (“Terra Operating LLC”) completed its sale of substantially all of its portfolio of solar power plants located in the United Kingdom (24 operating projects representing an aggregate 365.0 MW, the “U.K. Portfolio”) to Vortex Solar UK Limited, a renewable energy platform managed by the private equity arm of EFG Hermes, an investment bank. Terra Operating LLC received approximately $214.1 million of proceeds from the sale, which was net of transaction expenses of $3.9 million and distributions taken from the U.K. Portfolio after announcement and before closing of the sale. The Company also disposed of $14.8 million of cash and cash equivalents and $21.8 million of restricted cash as a result of the sale. The proceeds were used for the reduction of the Company's indebtedness (a $30.0 million prepayment for a non-recourse portfolio term loan and the remainder was applied towards revolving loans outstanding under its senior secured corporate-level revolving credit facility). The sale also resulted in a reduction in the Company's non-recourse project debt by approximately £301 million British Pounds (“GBP”) at the U.K. Portfolio level. The Company recognized a gain on the sale of $37.1 million, which is reflected within gain on sale of renewable energy facilities in the unaudited condensed consolidated statements of operations for the nine months ended September 30, 2017. The Company has retained one 11.1 MW solar project in the United Kingdom.

Residential Portfolio Sale

In the first nine months of 2017, the Company closed on the sale of 100% of the membership interests of Enfinity Colorado DHA 1, LLC, a Colorado limited liability company that owns and operates 2.5 MW of solar installations situated on the roof of public housing units located in Colorado and owned by the Denver Housing Authority, and 100% of the membership interests of TerraForm Resi Solar Manager, LLC, a subsidiary of the Company that owns and operates 8.9 MW of rooftop solar installations, to Greenbacker Residential Solar II, LLC. The Company received proceeds of $1.1 million and $6.0 million in the second and third quarter of 2017, respectively, as a result of the sale of these companies and also disposed of $0.6 million of


22




cash and cash equivalents and $0.8 million of restricted cash in the nine months of 2017. The Company recorded an impairment charge in the fourth quarter of 2016 when it was determined that these assets met the criteria for held for sale classification, and there was no additional loss recognized during 2017 as a result of these sales.

5. RENEWABLE ENERGY FACILITIES

Renewable energy facilities, net consists of the following:
(In thousands)
 
September 30,
2018
 
December 31,
2017
Renewable energy facilities in service, at cost1
 
$
7,309,599

 
$
5,378,462

Less: accumulated depreciation - renewable energy facilities
 
(763,154
)
 
(578,474
)
Renewable energy facilities in service, net
 
6,546,445

 
4,799,988

Construction in progress - renewable energy facilities
 
9,391

 
1,937

Total renewable energy facilities, net
 
$
6,555,836

 
$
4,801,925

———
(1) The increase in renewable energy facilities is primarily due to the acquisition of Saeta. See Note 4. Acquisitions and Dispositions.

Depreciation expense related to renewable energy facilities was $79.2 million and $194.2 million for the three and nine months respectively ended September 30, 2018, as compared to $53.4 million and $160.0 million for the same periods in the prior year.

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 Charges

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 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 nine months ended September 30, 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.

During the third quarter of 2017, the Company sold its remaining 0.3 MW of residential assets. These assets did not meet the criteria for held for sale classification in the second quarter of 2017, but the Company determined that certain impairment indicators were present and as a result recognized an impairment charge of $1.4 million, which is reflected within impairment of renewable energy facilities in the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2017.
    


23




6. INTANGIBLE ASSETS, NET AND GOODWILL

The following table presents the gross carrying amount, accumulated amortization and net book value of intangibles as of September 30, 2018:
(In thousands, except weighted average amortization period)
 
Weighted Average Amortization Period
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book Value
Concession and licensing contracts1
 
17 years
 
$
981,333

 
$
(16,683
)
 
$
964,650

Favorable rate revenue contracts
 
14 years
 
714,678

 
(132,396
)
 
582,282

In-place value of market rate revenue contracts
 
18 years
 
535,503

 
(94,414
)
 
441,089

Favorable rate land leases
 
16 years
 
15,800

 
(2,928
)
 
12,872

Total intangible assets, net
 
 
 
$
2,247,314

 
$
(246,421
)
 
$
2,000,893

 
 
 
 
 
 
 
 
 
Unfavorable rate revenue contracts
 
7 years
 
$
33,144

 
$
(17,834
)
 
$
15,310

Unfavorable rate operations and maintenance contracts
 
1 year
 
5,000

 
(3,490
)
 
1,510

Unfavorable rate land lease
 
14 years
 
1,000

 
(204
)
 
796

Total intangible liabilities, net2
 
 
 
$
39,144

 
$
(21,528
)
 
$
17,616

    
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, net2
 
 
 
$
41,086

 
$
(18,744
)
 
$
22,342

———
(1)
See Note.4 Acquisitions and Dispositions for a discussion of the intangible assets related to Saeta.
(2)
The Company’s intangible liabilities are classified within other long-term liabilities in the unaudited condensed consolidated balance sheets.

Amortization expense related to concessions and licensing contracts is reflected in the unaudited condensed consolidated statements of operations within depreciation, accretion and amortization expense. During the three and nine months ended September 30, 2018, amortization expense related to concessions and licensing contracts was $13.8 million and $16.7 million, respectively. No amortization expense was recorded for the same periods in 2017.

Amortization expense related to favorable rate revenue contracts is reflected in the unaudited condensed consolidated statements of operations as a reduction of operating revenues, net. Amortization related to unfavorable rate revenue contracts is reflected in the unaudited condensed consolidated statements of operations as an increase to operating revenues, net. During the three and nine months ended September 30, 2018, net amortization expense related to favorable and unfavorable rate revenue contracts resulted in a reduction of operating revenues, net of $9.9 million and $29.5 million, respectively, as compared to a $10.0 million and $29.5 million reduction of operating revenues, net for the same periods in 2017.



24




Amortization expense related to the in-place value of market rate revenue contracts is reflected in the unaudited condensed consolidated statements of operations within depreciation, accretion and amortization expense. During the three and nine months ended September 30, 2018, amortization expense related to the in-place value of market rate revenue contracts was $4.7 million and $21.6 million, respectively, as compared to $6.4 million and $19.4 million for the same periods in the prior year.

Amortization expense related to favorable rate land leases is reflected in the unaudited condensed consolidated statements of operations within cost of operations. Amortization related to the unfavorable rate land lease and unfavorable rate operations and maintenance (“O&M”) contracts is reflected in the unaudited condensed consolidated statements of operations as a reduction of cost of operations. During the three and nine months ended September 30, 2018, net amortization related to favorable and unfavorable rate land leases and unfavorable rate O&M contracts resulted in an increase of cost of operations of $0.1 million and $0.4 million, respectively, as compared to a $0.1 million decrease and $0.4 million decrease in cost of operations for the same periods in the prior year.

See Note 4. Acquisitions and Dispositions for discussion of goodwill related to the Saeta acquisition.

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. As a result of the Company's sale of TerraForm Resi Solar Manager, LLC, a subsidiary of the Company that owned and operated 8.9 MW of residential rooftop solar installations, during the second quarter of 2017, the related assets and liabilities of this VIE were deconsolidated. No other VIEs were deconsolidated during the nine months ended September 30, 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)
 
September 30,
2018
 
December 31,
2017
Current assets
 
$
124,690

 
$
142,403

Non-current assets
 
3,987,032

 
4,155,558

Total assets
 
$
4,111,722

 
$
4,297,961

Current liabilities
 
$
97,140

 
$
119,021

Non-current liabilities
 
1,055,560

 
975,839

Total liabilities
 
$
1,152,700

 
$
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.


25




8. LONG-TERM DEBT
    
Long-term debt, including affiliate amounts, consists of the following: 
(In thousands, except interest rates)
 
September 30,
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
 
487,810

 
60,000

 
Variable
 
5.13
 
Revolving loan
Term Loan4
 
347,375

 
350,000

 
Variable
 
4.24
 
Term debt
Non-recourse long-term debt5:
 
 
 
 
 
 
 
 
 
 
Permanent financing
 
3,553,349

 
1,616,729

 
Blended6
 
4.837
 
Term debt / Senior notes
Financing lease obligations
 
108,560

 
115,787

 
Imputed
 
5.597
 
Financing lease obligations
Total principal due for long-term debt and financing lease obligations
 
5,997,094

 
3,642,516

 
 
 
4.907
 
 
Unamortized discount, net
 
(16,315
)
 
(19,027
)
 
 
 
 
 
 
Deferred financing costs, net
 
(26,742
)
 
(24,689
)
 
 
 
 
 
 
Less: current portion of long-term debt and financing lease obligations
 
(454,306
)
 
(403,488
)
 
 
 
 
 
 
Long-term debt and financing lease obligations, less current portion
 
$
5,499,731

 
$
3,195,312

 
 
 
 
 
 
———
(1)
As of September 30, 2018.
(2)
Corporate-level debt represents debt issued by Terra Operating LLC and guaranteed by Terra LLC and certain subsidiaries of Terra Operating LLC other than non-recourse subsidiaries as defined in the relevant debt agreements (exception for 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. On October 5, 2018, Terra Operating LLC entered into an amendment to the Revolver (see Note 19. Subsequent Events). The September 30, 2018 balance includes $5.8 million drawn on an approximately $139.0 million revolving credit facility obtained by Saeta, as well as other credit facilities of Saeta. On October 26, 2018, Saeta repaid the outstanding balance under its revolving credit facility and terminated such facility.
(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 September 30, 2018, 44% of this balance had a fixed interest rate and the remaining 56% 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 September 30, 2018.

Non-recourse Debt Defaults

As of September 30, 2018 and December 31, 2017, the Company reclassified $193.9 million and $239.7 million, respectively, of the Company’s non-recourse long-term indebtedness, net of unamortized 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 consists of indebtedness of the Company’s renewable energy facility in Chile. The Company continues to amortize deferred financing costs and debt discounts over the maturities of the respective financing agreements as before the violations, as the Company believes there is a reasonable likelihood that it will be able to successfully negotiate a


26




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.

Non-recourse Project Financing

On June 6, 2018, one of the Company’s subsidiaries entered into a new non-recourse debt financing agreement, whereby it issued $83.0 million of 4.59% senior notes, secured by approximately 73 MW of utility-scale solar power plants located in Utah, Florida, Nevada and California that are owned by the Company's subsidiary. The proceeds of this financing were used to fund a portion of the acquisition of Saeta. The non-recourse senior notes mature on August 31, 2040 and amortize on a 22-year sculpted amortization schedule.

On September 28, 2018, one of the Company’s subsidiaries entered into a new non-recourse debt financing agreement whereby it iss