Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
 
 
 
FORM 10-Q
 
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018.
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-36087
 
 
 
PATTERN ENERGY GROUP INC.
(Exact name of Registrant as specified in its charter)
 
 
 
Delaware
 
90-0893251
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Pier 1, Bay 3, San Francisco, CA 94111
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (415) 283-4000
 
 
 
 
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     No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  
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
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes      No  
As of August 6, 2018 there were 98,096,323 shares of Class A common stock outstanding with par value of $0.01 per share.
 




PATTERN ENERGY GROUP INC.
REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018
TABLE OF CONTENTS
 
 
PART I. FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
Item 1A.
Item 6.
 



2


CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information in this Quarterly Report on Form 10-Q (Form 10-Q) may constitute “forward-looking statements.” You can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "should," "will," "would," or similar words. You should read statements that contain these words carefully because they discuss our current plans, strategies, prospects, and expectations concerning our business, operating results, financial condition, and other similar matters. While we believe that these forward-looking statements are reasonable as and when made, there may be events in the future that we are not able to predict accurately or control, and there can be no assurance that future developments affecting our business will be those that we anticipate. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
our ability to complete acquisitions of power projects;
our ability to complete construction of our construction projects and transition them into financially successful operating projects;
fluctuations in supply, demand, prices and other conditions for electricity, other commodities and renewable energy credits (RECs);
our electricity generation, our projections thereof and factors affecting production, including wind, solar and other conditions, other weather conditions, turbine and transmission availability and curtailment;
changes in law, including applicable tax laws;
public response to and changes in the local, state, provincial and federal regulatory framework affecting renewable energy projects, including those related to taxation, the U.S. federal production tax credit (PTC), investment tax credit (ITC) and potential reductions in Renewable Portfolio Standards (RPS) requirements;
the ability of our counterparties to satisfy their financial commitments or business obligations;
the availability of financing, including tax equity financing, for our power projects;
an increase in interest rates;
our substantial short-term and long-term indebtedness, including additional debt in the future;
competition from other power project developers;
development constraints, including the availability of interconnection and transmission;
potential environmental liabilities and the cost and conditions of compliance with applicable environmental laws and regulations;
our ability to operate our business efficiently, manage capital expenditures and costs effectively and generate cash flow;
our ability to retain and attract executive officers and key employees;
our ability to keep pace with and take advantage of new technologies;
the effects of litigation, including administrative and other proceedings or investigations, relating to our wind power projects under construction and those in operation;
conditions in energy markets as well as financial markets generally, which will be affected by interest rates, foreign currency exchange rate fluctuations and general economic conditions;
the effectiveness of our currency risk management program;
the effective life and cost of maintenance of our wind turbines, solar panels and other equipment;
the increased costs of, and tariffs on, spare parts;
scarcity of necessary equipment;
negative public or community response to wind and solar power projects;
the value of collateral in the event of liquidation; and
other factors discussed under “Risk Factors.”

3


For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see Part II, "Item 1A. Risk Factors" in this Form 10-Q and Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.


4


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Pattern Energy Group Inc.
Consolidated Balance Sheets
(In thousands of U.S. Dollars, except share data)
(Unaudited)
 
June 30,
 
December 31,

2018
 
2017
Assets

 

Current assets:

 

Cash and cash equivalents (Note 8)
$
116,538

 
$
116,753

Restricted cash (Note 8)
4,336

 
9,065

Counterparty collateral
5,824

 
29,780

Trade receivables (Note 8)
59,371

 
54,900

Derivative assets, current
16,148

 
19,445

Prepaid expenses (Note 8)
18,660

 
17,847

Deferred financing costs, current, net of accumulated amortization of $2,409 and $2,580 as of June 30, 2018 and December 31, 2017, respectively
1,422

 
1,415

Assets held for sale
307,231

 

Other current assets (Note 8)
21,726

 
21,105

Total current assets
551,256

 
270,310

Restricted cash (Note 8)
10,004

 
12,162

Major construction advances
48,898

 

Construction in progress
192,317

 

Property, plant and equipment, net (Note 8)
3,797,098

 
3,965,121

Unconsolidated investments
343,512

 
311,223

Derivative assets
17,341

 
9,628

Deferred financing costs
8,744

 
7,784

Net deferred tax assets
3,353

 
6,349

Finite-lived intangible assets, net (Note 8)
226,422

 
136,048

Goodwill
57,736

 

Other assets (Note 8)
27,421

 
22,906

Total assets
$
5,284,102

 
$
4,741,531

 
 
 
 
Liabilities and equity

 

Current liabilities:

 

Accounts payable and other accrued liabilities (Note 8)
$
38,799

 
$
53,615

Accrued construction costs (Note 8)
9,383

 
1,369

Counterparty collateral liability
5,824

 
29,780

Accrued interest (Note 8)
14,383

 
16,460

Dividends payable
42,072

 
41,387

Derivative liabilities, current
3,188

 
8,409

Revolving credit facility
201,000

 

Current portion of long-term debt, net
61,583

 
51,996

Liabilities related to assets held for sale
207,073

 

Other current liabilities (Note 8)
25,643

 
14,018

Total current liabilities
608,948

 
217,034

Long-term debt, net
1,923,743

 
1,878,735

Derivative liabilities
24,464

 
20,972

Net deferred tax liabilities
116,849

 
56,491

Finite-lived intangible liabilities, net (Note 8)
58,195

 
51,194

Contingent liabilities (Note 8)
165,214

 
62,398

Other long-term liabilities (Note 8)
152,998

 
106,565

Total liabilities
3,050,411

 
2,393,389

Commitments and contingencies (Note 17)


 


Equity:

 

Class A common stock, $0.01 par value per share: 500,000,000 shares authorized; 98,096,323 and 97,860,048 shares outstanding as of June 30, 2018 and December 31, 2017, respectively
983

 
980

Additional paid-in capital
1,210,610

 
1,234,846

Accumulated income (loss)

 
(112,175
)
Accumulated other comprehensive loss
(32,756
)
 
(25,691
)
Treasury stock, at cost; 178,346 and 157,812 shares of Class A common stock as of June 30, 2018 and December 31, 2017, respectively
(3,892
)
 
(3,511
)
Total equity before noncontrolling interest
1,174,945

 
1,094,449

Noncontrolling interest
1,058,746

 
1,253,693

Total equity
2,233,691

 
2,348,142

Total liabilities and equity
$
5,284,102

 
$
4,741,531

See accompanying notes to consolidated financial statements.

5


Pattern Energy Group Inc.
Consolidated Statements of Operations
(In thousands of U.S. Dollars, except share data)
(Unaudited)

 
Three months ended June 30,
 
Six months ended June 30,
 
2018

2017
 
2018
 
2017
Revenue:



 
 
 
 
Electricity sales
$
135,951


$
105,736

 
$
238,098

 
$
204,170

Other revenue
3,989


2,024

 
13,501

 
4,423

Total revenue
139,940


107,760

 
251,599

 
208,593

Cost of revenue:



 
 
 
 
Project expense
33,665


33,405

 
68,227

 
62,505

Transmission costs
7,643

 
4,722

 
14,833

 
4,792

Depreciation, amortization and accretion
54,979


48,518

 
110,431

 
92,258

Total cost of revenue
96,287


86,645

 
193,491

 
159,555

Gross profit
43,653


21,115

 
58,108

 
49,038

Operating expenses:



 
 
 
 
General and administrative
9,089


11,777

 
19,795

 
22,901

Related party general and administrative
3,663


3,576

 
7,731

 
7,002

Impairment loss
4,238

 

 
4,238

 

Total operating expenses
16,990


15,353

 
31,764

 
29,903

Operating income
26,663


5,762

 
26,344

 
19,135

Other expense:



 
 
 
 
Interest expense
(27,709
)

(24,839
)
 
(53,153
)
 
(47,394
)
Gain (loss) on derivatives
8,801


(4,751
)
 
14,461

 
(5,399
)
Earnings (loss) in unconsolidated investments, net
(742
)

14,519

 
17,470

 
31,395

Net loss on transactions
(2,002
)

(807
)
 
(3,100
)
 
(1,119
)
Other income (expense), net
(2,375
)

(27
)
 
(5,222
)
 
553

Total other expense
(24,027
)

(15,905
)
 
(29,544
)
 
(21,964
)
Net income (loss) before income tax
2,636


(10,143
)
 
(3,200
)
 
(2,829
)
Tax provision
4,410


4,541

 
11,194

 
9,316

Net loss
(1,774
)

(14,684
)
 
(14,394
)
 
(12,145
)
Net loss attributable to noncontrolling interest
(34,492
)

(28,904
)
 
(183,034
)
 
(32,018
)
Net income attributable to Pattern Energy
$
32,718


$
14,220

 
$
168,640

 
$
19,873

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding



 
 
 
 
Basic
97,459,472

 
87,065,591

 
97,444,016

 
87,064,110

Diluted
97,496,217

 
87,217,381

 
105,662,687

 
87,257,130

Earnings per share attributable to Pattern Energy
 
 
 
 
 
 
 
Basic
$
0.34

 
$
0.16

 
$
1.73

 
$
0.23

Diluted
$
0.34

 
$
0.16

 
$
1.67

 
$
0.23

Dividends declared per Class A common share
$
0.42

 
$
0.42

 
$
0.84

 
$
0.83


See accompanying notes to consolidated financial statements.

6


Pattern Energy Group Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands of U.S. Dollars)
(Unaudited)

 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(1,774
)
 
$
(14,684
)
 
$
(14,394
)
 
$
(12,145
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation, net of zero tax impact
(13,346
)
 
7,286

 
(22,448
)
 
9,749

Derivative activity:
 
 
 
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax benefit (provision) of $100, ($98), $1,046 and ($59), respectively
4,991

 
(3,877
)
 
8,736

 
(4,418
)
Reclassifications to net loss due to de-designation of interest rate derivatives, net of zero tax impact
(1,529
)
 

 
(1,529
)
 

Reclassifications to net loss, net of tax impact of $74, $236, $339 and $487, respectively
1,222

 
2,164

 
2,618

 
4,483

Total change in effective portion of change in fair value of derivatives
4,684

 
(1,713
)
 
9,825

 
65

Proportionate share of equity investee’s derivative activity:
 
 
 
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax provision of ($184), ($1,064), ($475) and ($285), respectively
509

 
2,950

 
1,317

 
790

Reclassifications to net loss, net of tax impact of $408, $629, $898 and $1,661, respectively
1,129

 
1,747

 
2,489

 
4,608

Total change in effective portion of change in fair value of derivatives
1,638

 
4,697

 
3,806

 
5,398

Total other comprehensive income (loss), net of tax
(7,024
)
 
10,270

 
(8,817
)
 
15,212

Comprehensive income (loss)
(8,798
)
 
(4,414
)
 
(23,211
)
 
3,067

Less comprehensive income (loss) attributable to noncontrolling interest:
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interest
(34,492
)
 
(28,904
)
 
(183,034
)
 
(32,018
)
Foreign currency translation, net of zero tax impact
(1,286
)
 

 
(2,913
)
 

Derivative activity:
 
 
 
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax benefit (provision) of $42, $93, ($108) and $101, respectively
375

 
(253
)
 
981

 
(274
)
Reclassifications to net gain due to de-designation of interest rate derivatives, net of zero tax impact
(447
)
 

 
(447
)
 

Reclassifications to net loss, net of tax impact of ($25), $29, $3 and $62, respectively
280

 
79

 
627

 
167

Total change in effective portion of change in fair value of derivatives
208

 
(174
)
 
1,161

 
(107
)
Comprehensive loss attributable to noncontrolling interest
(35,570
)
 
(29,078
)
 
(184,786
)
 
(32,125
)
Comprehensive income attributable to Pattern Energy
$
26,772

 
$
24,664

 
$
161,575

 
$
35,192

See accompanying notes to consolidated financial statements.

7



Pattern Energy Group Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands of U.S. Dollars, except share data)
(Unaudited)
 
 
Class A Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Accumulated Income (Loss)
 
Accumulated Other Comprehensive Income (Loss)
 
Total
 
Noncontrolling Interest
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balances at December 31, 2016
87,521,651

 
$
875

 
(110,964
)
 
$
(2,500
)
 
$
1,145,760

 
$
(94,270
)
 
$
(62,367
)
 
$
987,498

 
$
891,246

 
$
1,878,744

Issuance of Class A common stock under equity incentive award plan
231,311

 
3

 

 

 
(3
)
 

 

 

 

 

Repurchase of shares for employee tax withholding

 

 
(4,182
)
 
(97
)
 

 

 

 
(97
)
 

 
(97
)
Stock-based compensation

 

 

 

 
2,768

 

 

 
2,768

 

 
2,768

Dividends declared

 

 

 

 
(72,934
)
 

 

 
(72,934
)
 

 
(72,934
)
Contributions from noncontrolling interests

 

 

 

 

 

 

 

 
325,600

 
325,600

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(9,164
)
 
(9,164
)
Other

 

 

 

 
(143
)
 

 

 
(143
)
 
(127
)
 
(270
)
Net income (loss)

 

 

 

 

 
19,873

 

 
19,873

 
(32,018
)
 
(12,145
)
Other comprehensive income (loss), net of tax

 

 

 

 

 

 
15,319

 
15,319

 
(107
)
 
15,212

Balances at June 30, 2017
87,752,962

 
$
878

 
(115,146
)
 
$
(2,597
)
 
$
1,075,448

 
$
(74,397
)
 
$
(47,048
)
 
$
952,284

 
$
1,175,430

 
$
2,127,714

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2017
98,017,860

 
$
980

 
(157,812
)
 
$
(3,511
)
 
$
1,234,846

 
$
(112,175
)
 
$
(25,691
)
 
$
1,094,449

 
$
1,253,693

 
$
2,348,142

Issuance of Class A common stock under equity incentive award plan
256,809

 
3

 

 

 
(3
)
 

 

 

 

 

Repurchase of shares for employee tax withholding

 

 
(20,534
)
 
(381
)
 

 

 

 
(381
)
 

 
(381
)
Stock-based compensation

 

 

 

 
2,277

 

 

 
2,277

 

 
2,277

Dividends declared

 

 

 

 
(26,301
)
 
(56,465
)
 

 
(82,766
)
 

 
(82,766
)
Acquisitions

 

 

 

 

 

 

 

 
11,113


11,113

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(21,274
)
 
(21,274
)
Other

 

 

 

 
(209
)
 

 

 
(209
)
 

 
(209
)
Net income (loss)

 

 

 

 

 
168,640

 

 
168,640

 
(183,034
)
 
(14,394
)
Other comprehensive loss, net of tax

 

 

 

 

 

 
(7,065
)
 
(7,065
)
 
(1,752
)
 
(8,817
)
Balances at June 30, 2018
98,274,669

 
$
983

 
(178,346
)
 
$
(3,892
)
 
$
1,210,610

 
$

 
$
(32,756
)
 
$
1,174,945

 
$
1,058,746

 
$
2,233,691


See accompanying notes to consolidated financial statements.

8


Pattern Energy Group Inc.
Consolidated Statements of Cash Flows
(In thousands of U.S. Dollars)
(Unaudited)

 
Six months ended June 30,

2018
 
2017
Operating activities

 

Net loss
$
(14,394
)
 
$
(12,145
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 


Depreciation, amortization and accretion
110,431

 
92,258

Contingent liability accretion
5,716

 

Impairment loss
4,238

 

Amortization of financing costs
2,526

 
3,852

Amortization of debt discount/premium, net
2,477

 
2,227

Amortization of power purchase agreements, net
3,894

 
1,489

Loss (gain) on derivatives
(1,542
)
 
10,331

Stock-based compensation
2,277

 
2,768

Deferred taxes
10,914

 
9,149

Earnings in unconsolidated investments, net
(17,470
)
 
(31,395
)
Distributions from unconsolidated investments
33,041

 
31,710

Other reconciling items
(67
)
 
(1,017
)
Changes in operating assets and liabilities:
 
 


Counterparty collateral asset
23,956

 
9,199

Trade receivables
(9,689
)
 
(7,995
)
Prepaid expenses
899

 
2,202

Other current assets
6,316

 
(3,638
)
Other assets (non-current)
(1,737
)
 
2,561

Accounts payable and other accrued liabilities
(13,889
)
 
31,001

Counterparty collateral liability
(23,956
)
 
(9,199
)
Accrued interest
166

 
8,569

Other current liabilities
(7,141
)
 
4,333

Long-term liabilities
7,858

 
10,648

Contingent liabilities
(1,508
)
 
275

Derivatives
228

 

Net cash provided by operating activities
123,544

 
157,183

Investing activities

 

Cash paid for acquisitions, net of cash and restricted cash acquired
(157,543
)
 
(170,028
)
Payment for construction advances/deposits
(53,727
)
 

Payment for construction in progress
(24,644
)
 

Capital expenditures
(7,441
)
 
(39,087
)
Distributions from unconsolidated investments
4,333

 
8,390

Other assets
(319
)
 
7,552

Investment in Pattern Development 2.0
(57,055
)
 

Other investing activities

 
12

Net cash used in investing activities
(296,396
)
 
(193,161
)

9


Pattern Energy Group Inc.
Consolidated Statements of Cash Flows
(In thousands of U.S. Dollars)
(Unaudited)

 
Six months ended June 30,

2018
 
2017
Financing activities

 

Dividends paid
(82,487
)
 
(71,544
)
Capital distributions - noncontrolling interest
(21,274
)
 
(9,163
)
Payment for financing fees
(6,954
)
 
(7,740
)
Proceeds from revolving credit facility
333,000

 
85,000

Repayment of revolving credit facility
(132,000
)
 
(205,000
)
Proceeds from long-term debt
126,775

 
404,395

Repayment of long-term debt
(34,541
)
 
(74,824
)
Repayment of note payable - related party
(909
)
 

Other financing activities
154

 
(3,618
)
Net cash provided by financing activities
181,764

 
117,506

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(2,388
)
 
2,248

Net increase in cash, cash equivalents and restricted cash including cash classified within current assets and liabilities held for sale
6,524

 
83,776

Add: Net (decrease) in cash classified within current assets and liabilities held for sale
(13,626
)
 

Net change in cash, cash equivalents and restricted cash
(7,102
)
 
83,776

Cash, cash equivalents and restricted cash at beginning of period
137,980

 
109,371

Cash, cash equivalents and restricted cash at end of period
$
130,878

 
$
193,147

Supplemental disclosures

 

Cash payments for income taxes
$
443

 
$
288

Cash payments for interest expense
$
48,721

 
$
33,666

Business combination:
 
 
 
Assets acquired, net of cash and restricted cash acquired
$
627,241

 
$
665,014

Liabilities assumed
352,570

 
148,456

Less: Noncontrolling interests
11,113

 
325,600

Net assets acquired, net of cash and restricted cash acquired
$
263,558

 
$
190,958

Schedule of non-cash activities


 


Change in property, plant and equipment
$
117,103

 
$
1,110

Change in other assets
$
202

 
$
2,492

Accrual of dividends
$
87

 
$


See accompanying notes to consolidated financial statements.

10


Pattern Energy Group Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1.    Organization
Pattern Energy Group Inc. (Pattern Energy or the Company) was organized in the state of Delaware on October 2, 2012. Pattern Energy is an independent energy generation company focused on constructing, owning and operating energy projects with long-term energy sales contracts. Pattern Energy Group LP (Pattern Development 1.0) owns a 5.1% interest in the Company at June 30, 2018. The Pattern Development Companies (Pattern Development 1.0, Pattern Energy Group 2 LP (Pattern Development 2.0) and their respective subsidiaries) are leading developers of renewable energy and transmission projects.
The Company consists of the consolidated operations of certain entities purchased principally from Pattern Development 1.0, except for purchases of Lost Creek, Post Rock and certain additional interests in El Arrayán (each as defined below) which were purchased from third-parties. Each of the Company's wind and solar projects and certain assets are included in the Company's subsidiaries as follows:
Pattern US Operations Holdings LLC (which consists primarily of 100% ownership of Hatchet Ridge Wind, LLC (Hatchet Ridge), Spring Valley Wind LLC (Spring Valley), Pattern Santa Isabel LLC (Santa Isabel), Ocotillo Express LLC (Ocotillo), Pattern Gulf Wind LLC (Gulf Wind) and Lost Creek Wind, LLC (Lost Creek), as well as the following consolidated controlling interest in Panhandle Wind LLC (Panhandle 1), Panhandle Wind 2 LLC (Panhandle 2), Post Rock Wind Power Project, LLC (Post Rock), Logan's Gap Wind LLC (Logan's Gap), Fowler Ridge IV Wind Farm LLC (Amazon Wind), and Broadview Finco Pledgor LLC ((Broadview Project) (which consists primarily of Broadview Energy KW, LLC and Broadview Energy JN, LLC (together, Broadview) and Western Interconnect LLC, a transmission line (Western Interconnect)));
Pattern Canada Operations Holdings ULC (which consists primarily of 100% ownership of St. Joseph Windfarm Inc. (St. Joseph), a consolidated controlling interest in Meikle Wind Energy Limited Partnership (Meikle) and noncontrolling interests in South Kent Wind LP (South Kent), Grand Renewable Wind LP (Grand), K2 Wind Ontario Limited Partnership (K2), and SP Armow Wind Ontario LP (Armow) which are accounted for as unconsolidated investments);
Pattern Chile Holdings LLC (which includes a controlling interest in Parque Eólico El Arrayán SpA (El Arrayán Wind) and a controlling interest in Don Goyo Transmisión S.A. (Don Goyo), a transmission asset of El Arrayán Wind) (see Note 4, Assets Held for Sale); and
Green Power Tsugaru Holdings G.K. (Tsugaru Holdings) (which consists primarily of 100% ownership of Green Power Tsugaru G.K. (Tsugaru)) and Green Power Generation G.K. (which consists primarily of 100% ownership in GK Green Power Otsuki (Ohorayama), Otsuki Wind Power Corporation (Otsuki), and GK Green Power Kanagi (Kanagi), and consolidated controlling interest in GK Green Power Futtsu (Futtsu)). (See Note 5, Acquisitions).
During the six months ended June 30, 2018, the Company has funded $57.1 million into Pattern Development 2.0 of which approximately $27 million was used by Pattern Development 2.0 to fund the purchase of Green Power Investments (GPI), located in Japan. As of June 30, 2018, the Company has funded $124.4 million in aggregate and holds an approximately 24% ownership interest in Pattern Development 2.0.
2.    Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The 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 in consolidation.

11


Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the interim financial information reflects all adjustments of a normal recurring nature, necessary for a fair statement of the Company’s financial position at June 30, 2018, the results of operations and comprehensive income (loss) for the three and six months ended June 30, 2018 and 2017, respectively, and the cash flows for the six months ended June 30, 2018 and 2017, respectively. The consolidated balance sheet at December 31, 2017 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. This Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates, and such differences may be material to the financial statements.
Reclassification
Certain prior period balances have been reclassified to conform to the current period presentation in the Company’s consolidated financial statements and the accompanying notes.
In the second quarter of 2018, the Company identified a $1.3 million error in tax expense related to the recognition of net operating loss carryforwards in its Chilean entity. The Company concluded the error was not material to any previously reported period and is not material to 2018. The Company recorded the error as an out-of-period adjustment in the second quarter of 2018.
Reconciliation of Cash and Cash Equivalents and Restricted Cash as Presented on the Statements of Cash Flows
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands):
 
 
June 30, 2018
 
December 31,
2017
Cash and cash equivalents
 
$
116,538

 
$
116,753

Restricted cash - current
 
4,336

 
9,065

Restricted cash
 
10,004

 
12,162

Cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
 
$
130,878

 
$
137,980

Assets Held for Sale
The Company records assets held for sale at the lower of the carrying value or fair value less costs to sell. The following criteria are used to determine if property is held for sale: (i) management has the authority and commits to a plan to sell the property; (ii) the property is available for immediate sale in its present condition; (iii) there is an active program to locate a buyer and the plan to sell the property has been initiated; (iv) the sale of the property is probable within one year; (v) the property is being actively marketed at a reasonable price relative to its current fair value; and (vi) it is unlikely that the plan to sell will be withdrawn or that significant changes to the plan will be made.
In determining the fair value of the assets less costs to sell, the Company considers factors including current sales prices and any recent legitimate offers. If the estimated fair value less costs to sell of an asset is less than its current carrying value, the asset is written down to its estimated fair value less costs to sell. Due to uncertainties in the estimation process, it is possible that actual results could differ from the estimates used in the Company's historical analysis. The Company's assumptions about project sale prices require significant judgment because the current market is highly sensitive to changes in economic conditions. The Company estimates the fair values of assets held for sale based on current market conditions and assumptions made by management, which

12


may differ from actual results and may result in additional impairments if market conditions deteriorate. When assets are classified as held for sale, the Company does not continue to record depreciation or amortization for the respective assets.
Major Construction Advances
Major construction advances represent amounts advanced to suppliers for the manufacture of wind turbines, transmission lines, and solar panels in accordance with component equipment supply agreements for the Company's projects and for which the Company has not taken title or advances to builders in accordance with balance of plant contracts. These advances are reclassified to construction in progress when the Company takes legal title to the equipment.
Goodwill
The Company records goodwill when the cost of an acquisition exceeds the fair value of the tangible and identified intangibles of the acquired business. Goodwill is not amortized, but is subject to an assessment for impairment at least annually or more frequently if events occur or circumstances change that will more likely than not reduce the fair value of the reporting unit below its carrying amount. 
The 2017 Tax Act
On December 22, 2017, the 2017 Tax Act (Tax Act) was enacted, which significantly revises the U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system and imposing a one-time tax on foreign unremitted earnings. The Tax Act also establishes several new tax provisions effective in 2018.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.
As of December 31, 2017, the Company was able to make a reasonable estimate of the impact of several provisions of the Tax Act, including the repatriation provisions and the Tax Act’s reduction of the U.S. federal tax rate from 35% to 21% which impacts the Company's U.S. deferred tax assets and deferred liabilities. The U.S operations as of December 31, 2017 were in a net deferred tax asset position offset by a full valuation allowance and thus, any adjustments to the deferred accounts did not impact the tax provision. Although the Company made a reasonable estimate of the amounts related to the repatriation provisions and deferred tax assets and deferred tax liabilities disclosed, a final determination of the Tax Act’s impact on the Company’s tax provision and deferred tax assets and deferred tax liabilities and related valuation allowance requirements remained incomplete as of December 31, 2017 pending a full analysis of the provisions and their interpretations. As of June 30, 2018, the Company has not changed the provisional estimates recognized in 2017, and therefore no impact was reflected in the effective tax rate for the period ended June 30, 2018. Given the complexity of the Tax Act, the Company is still evaluating the tax impact and obtaining the information, including data from third parties and other items, required to complete the accounting. The date the Company expects to complete the accounting is not currently determinable while it continues to obtain the information required to complete the accounting.
The Tax Act also includes a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries. Entities can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, the Company is still evaluating the tax impact and has not yet made the accounting policy election.
Recently Issued Accounting Standards
Except for the evaluation of recently issued accounting standards set forth below, there have been no changes to the Company's evaluation of other recently issued accounting standards disclosed in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605) and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The

13


Company adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective transition method. The adoption did not have material impact on the Company's consolidated financial statements, other than additional disclosures. See Note 3, Revenue for further details.
In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02), which requires lessees to recognize right-of-use assets and lease liabilities, for all leases, with the exception of short-term leases, at the commencement date of each lease. Under the new guidance, lessor accounting is largely unchanged. ASU 2016-02 simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and liabilities. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. The amendments of this update should be applied using a modified retrospective approach, which requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented. The Company is implementing a number of system enhancements to facilitate the identification, tracking and reporting of leases based upon the requirements of the new lease standard. The Company is also assessing the accounting impact of the ASU 2016-02 as it applies to its power purchase agreements (PPAs), land leases, office leases and equipment leases. As the Company progresses further in its analysis, the scope of this assessment could be expanded to review other types of contracts. The Company is continuing to assess the transition options and practical expedients, and monitoring industry implementation issues. The Company will adopt ASU 2016-02, as updated through various amendments, beginning January 1, 2019.
3.    Revenue
The Company sells electricity and related renewable energy credits (RECs) under the terms of PSAs or at market prices. Depending on the terms of the PSAs, the Company may account for the contracts as operating leases pursuant to ASC 840, Leases (ASC 840), derivative instruments pursuant to ASC 815, Derivatives and Hedging (ASC 815) or contracts with customers pursuant to Topic 606. A majority of the Company's revenues are accounted for under ASC 840 or ASC 815.
On January 1, 2018, the Company adopted the new accounting standard Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, and all the related amendments (Topic 606) and applied Topic 606 to its power sale agreement (PSA) contracts previously accounted for under Topic 605, using the modified retrospective method. Results of the reporting period beginning January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting under Topic 605.
The Company did not record any adjustment to the opening retained earnings as of January 1, 2018 as a result of adopting Topic 606. Additionally, the adoption of Topic 606 does not materially change the presentation of revenue.
Revenue Recognition
Revenues from contracts with customers are recognized when control of promised goods and services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
The following table presents the Company's total revenue recognized and, for contracts with customers, disaggregated by revenue sources (in thousands).
 
 
Three Months Ended June 30,
Six Months Ended June 30,
 
 
2018
 
2017(1)
 
2018
 
2017(1)
Revenue from contracts with customers
 
 
 
 
 
 
 
 
Electricity sales under PSA
 
17,414

 
16,580

 
38,100

 
35,401

Electricity sales to market
 
4,536

 
3,116

 
6,729

 
6,515

REC sales
 
3,398

 
2,044

 
5,345

 
4,326

Total revenue from contracts with customers
 
25,348

 
21,740

 
50,174

 
46,242

Other electricity sales (2)
 
110,603

 
83,996

 
187,924

 
157,928

Related party other revenue
 
3,989

 
2,024

 
13,501

 
4,423

Total revenue
 
$
139,940

 
$
107,760

 
$
251,599

 
$
208,593

(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.
(2) Includes revenue from PSAs accounted for as leases and energy hedge contracts.

14


Electricity Sales
The Company generates revenues primarily by delivering electricity to customers under PSAs and market participants. The revenues are primarily determined by the price of the electricity under the PSAs or market price multiplied by the amount of electricity that the Company delivers.
The Company transfers control of the electricity over time and the customer simultaneously receives and consumes the benefits provided by the Company's performance as it performs. Accordingly, the Company has concluded that the sale of electricity over the term of the agreement represents a series of distinct goods that are substantially the same and that have the same pattern of transfer to the customer. Each distinct transfer of electricity in megawatt hours (MWh) that the Company promises to transfer to the customer meets the criteria to be a performance obligation satisfied over time. The electricity sales are recognized based on an output measure, as each MWh is delivered to the customers. The Company recognizes revenue based on the amount invoiced on the basis of the prices multiplied by MWh delivered. The Company does not determine the total transaction price at contract inception, allocate the transaction price to performance obligations, or disclose the value of remaining performance obligations for contracts for which it recognizes revenue as invoiced.
Transaction Price Allocated to the Remaining Performance Obligations
The Company expects to recognize under PSAs for the following amounts related to fixed consideration associated with remaining performance obligations in each of the future periods noted as of June 30, 2018 (in thousands):


Amount
Remainder of 2018

$
41,953

2019

73,233

2020

60,662

2021

60,662

2022

60,662

Thereafter

255,467

Total

$
552,639

Renewable Energy Credits Sales
Each promise to deliver RECs is a distinct performance obligation that is satisfied at a point in time as none of the criteria are met to account for such promise as performance obligation satisfied over time. The Company either delivers RECs with electricity under PSAs or on a standalone basis (in a contract that does not include electricity). When RECs are sold on a standalone basis, the revenue related to the RECs is recognized at the point in time at which control of the energy credits is transferred to customers. RECs delivered under PSAs with electricity are immaterial in the context of the contracts with customers and therefore not separately accounted for.
Remaining performance obligations represent the transaction price of standalone RECs for which RECs have not been delivered to the customer's account. The transaction price is determined on the basis of the stated contract price multiplied by RECs to be delivered. As of June 30, 2018, approximately $21.5 million of revenue is expected to be recognized from remaining performance obligations associated with existing contracts for the standalone sale of RECs. The Company expects to recognize revenue on approximately half of these remaining performance obligations over the next 24 months, with the balance recognized thereafter.
Contract Balances
The Company did not record any contract assets as none of its right to payment was subject to something other than passage of time. The Company also did not record any contract liabilities as it recognizes revenue only at the amount to which it has the right to invoice for the electricity and RECs delivered; therefore, there are no advanced payments or billings in excess of electricity or RECs delivered.

15


4.    Assets Held for Sale
Chilean Sale
On May 21, 2018, the Company, through its indirect wholly-owned subsidiaries, entered into a stock purchase agreement (El Arrayán SPA) with a third party pursuant to which the Company agreed to sell, and the buyer agreed to purchase, certain subsidiaries which hold approximately a 71% interest in El Arrayán Wind and assets and rights relating to ownership and operation of an extension of the trunk transmission system in Chile. El Arrayán Wind is a wind electric generation facility located approximately 400 kilometers north of Santiago on the coast of Chile in which the Company has an owned interest of approximately 81 MW. The Company expects to receive cash consideration of $68.5 million, subject to working capital adjustments, and expects to close the transaction within one year.
Upon entering the El Arrayán SPA, the Company classified the assets and liabilities, held by the identified subsidiaries, as held for sale. The Company measured impairment loss as the difference between the carrying amount of the net assets and the sales price less estimated costs to sell. As a result, the Company recorded a total impairment loss of $4.2 million as of June 30, 2018.
The following table summarizes the fair value of the major classes of assets and liabilities which are classified as held for sale in the consolidated balance sheets (in thousands):

 
June 30,
2018
Assets
 
 
Cash, and cash equivalents
 
$
8,149

Restricted cash
 
5,477

Trade receivables
 
7,094

Property, plant and equipment, net
 
284,642

Other assets
 
1,869

Total assets held for sale
 
$
307,231

 
 
 
Liabilities
 
 
Accounts payable and other accrued liabilities
 
$
7,556

Long-term debt
 
184,989

Net deferred tax liabilities
 
10,652

Other liabilities
 
3,876

Total liabilities held for sale
 
$
207,073

 
 
 
Less noncontrolling interest
 
31,713

Net assets and liabilities held for sale attributable to Pattern Energy
 
$
68,445

5.    Acquisitions
Business Combinations
Japan Acquisition
On March 7, 2018, pursuant to a series of purchase and sale agreements with Pattern Development 1.0 and GPI, the Company acquired Tsugaru Holdings which owns Tsugaru, a project company currently constructing a 122 MW name plate capacity wind facility in Aomori Prefecture, Japan expected to commence commercial operations in early to mid-2020; Ohorayama, a wind project located in Kochi Prefecture, Japan, with a name plate capacity of 33 MW that commenced commercial operations in March 2018; Kanagi, a solar project located in Shimane Prefecture, Japan, with a name plate capacity of 10 MW that commenced commercial operations in 2016; Otsuki, a wind project located in Kochi Prefecture, Japan, with a name plate capacity of 12 MW that commenced commercial operations in 2006; and Futtsu, a solar project located in Chiba Prefecture, Japan, with a name plate capacity of 29 MW that commenced commercial operations in 2016; collectively referred to as the Japan Acquisition. The acquisition is in alignment with the Company's strategy to expand its portfolio of power generating projects.

16


Total consideration for the Japan Acquisition was $282.5 million, which consisted of approximately $176.6 million of cash and post-closing contingent payments with an acquisition date fair value of approximately $105.9 million. As part of the acquisition, the Company also assumed $181.3 million of debt. The Company incurred transaction-related expenses of $1.3 million which were recorded in net loss on transactions in the consolidated statements of operations for the six months ended June 30, 2018.
The identifiable assets, operating contracts and liabilities assumed for the Japan Acquisition were recorded at their fair values, which corresponded to the sum of the cash purchase price, contingent consideration payment, and the fair value of the other investor's noncontrolling interests.
The following table details the total consideration paid by the Company and the fair value of the assets acquired and liabilities assumed (in thousands):


March 7, 2018
Consideration
 
$
282,548

Identifiable assets acquired:
 

Cash and cash equivalents (1)

$
10,100

Restricted cash, current (1)

8,325

Trade receivables (1)

3,005

Prepaid expenses (1)

2,207

Other current assets (1)

8,368

Major equipment advances (1)

1,240

Restricted cash, noncurrent (1)

565

Deferred financing costs, net (1)

1,337

Property, plant and equipment

263,281

Construction in progress

180,949

Land (1)

112

Goodwill

60,302

Finite lived intangible assets

103,170

Other noncurrent assets (1)

3,270

Identifiable liabilities assumed:
 

Accounts payable and other accrued liabilities (1)

(6,607
)
Accrued interest (1)

(474
)
Accrued construction costs (1)

(4,128
)
Contingent liabilities, current

(16,249
)
Current portion of long-term debt

(7,511
)
Other current liabilities (1)

(22,094
)
Long-term debt

(173,828
)
Deferred tax liabilities

(67,179
)
Asset retirement obligations

(39,872
)
Finite lived intangible liability

(9,252
)
Derivative liabilities

(5,376
)
Assets and liabilities assumed before noncontrolling interests

293,661

Less: noncontrolling interests

(11,113
)
Consideration

$
282,548

(1) Amounts recorded at carrying value which was representative of the fair value on the date of acquisition.
Property, plant and equipment, construction in progress, and finite-lived intangible assets were recorded at fair value estimated using the cost and income approach. The fair value of asset retirement obligations, long-term debt, finite lived intangible liability and derivative liabilities were recorded at fair value using a combination of market data, operational data and discounted cash

17


flows and were adjusted by a discount rate factor reflecting current market conditions at the time of acquisition. The noncontrolling interest in Futtsu was recorded at fair value estimated using a projected cash flow stream of distributable cash, discounted to present value with a discount rate reflecting the cost of equity adjusted for control premium.
The predecessor’s tax bases were carried forward for tax purposes. Accordingly, the Company recorded deferred tax liabilities on the bases differences arising from the step up to fair value for financial reporting purposes but not for tax purposes.
The Company assumed a $16.2 million contingent liability as part of the acquisition. The payment of this liability is subject to the completion of a construction milestone at Tsugaru and is calculated based on the nameplate capacity of Tsugaru.
Contingent purchase consideration with a fair value of $102.9 million, subject to foreign currency exchange rate changes, is contingent upon term conversion of the Tsugaru construction loan and to the extent such term conversion does not occur such consideration will be made upon the commencement of commercial operations of Tsugaru, both of which are expected to occur in 2020. Additionally, the Company is obligated to make a $3.0 million, subject to foreign currency exchange rate changes, cash distribution payment to Pattern Development 1.0 upon term conversion of the Ohorayama construction loan which occurred in June 2018. The payment of this consideration is expected to occur in late 2018. See Note 14, Fair Value Measurements for further discussion in the fair value of the contingent consideration.
The accounting for this acquisition is preliminary. The fair value estimates for the assets acquired and liabilities assumed are based on preliminary calculations and valuations, and the estimates and assumptions are subject to change as additional information is obtained for the estimates during the measurement period (up to one year from the acquisition date). During the three months ended June 30, 2018, the Company adjusted the initial valuation by increasing property, plant and equipment by $0.6 million and decreasing construction in progress by $0.6 million which are a result of the updated inputs used in determining the fair value of these assets and liabilities.
Broadview Project Acquisition
On April 21, 2017, pursuant to a Purchase and Sale Agreement with Pattern Development 1.0, the Company acquired a 100% ownership interest in Broadview Project which indirectly owns both 100% of the Class B membership interest in Broadview Energy Holdings LLC (Broadview Holdings) and a 99% ownership interest in Western Interconnect, a 35-mile 345 kV transmission line. Broadview Holdings owns 100% ownership interests that comprise the 324 MW Broadview wind power projects, which achieved commercial operations in the first quarter of 2017. The acquisition is in alignment with the Company's strategy to expand its portfolio of generating projects. The Company's indirect Class B membership interest in Broadview Holdings represents an 84% initial interest in distributable cash flow from Broadview. Consideration consisted of $214.7 million of cash, a $2.4 million assumed liability and a post-closing payment of approximately $21.3 million contingent upon the commercial operation of the Grady Project (as defined below). As part of the acquisition, the Company also assumed $51.2 million of construction debt and related accrued interest outstanding at Western Interconnect which was immediately extinguished, and concurrently the Company entered into a variable rate term loan for $54.4 million. The Grady Wind Energy Center LLC (the Grady Project) is a wind power project being developed by Pattern Development 2.0 separately from Broadview, which is under construction, and which will be interconnected through Western Interconnect.
The identifiable assets, operating contracts and liabilities assumed for the Broadview Project were recorded at their fair values, which corresponded to the sum of the cash purchase price, contingent consideration payment, and the fair value of the other investors' noncontrolling interests. As described in the Company's Form 10-K for the year ended December 13, 2017, the accounting for the Broadview Project acquisition is final.
Supplemental Pro Forma Data (unaudited)
Ohorayama commenced operations in March 2018 and until approximately one week before acquisition, Ohorayama was still under construction. In addition, Tsugaru is expected to commence commercial operations in early to mid-2020. Therefore, pro forma data for Ohorayama and Tsugaru have not been provided as there is no material difference between pro forma data that give effects to the Japan Acquisition as if it had occurred on January 1, 2017 and the actual data reported for the three and six months ended June 30, 2018 and 2017.
Broadview reached commercial operations in March 2017 and until approximately three weeks before acquisition, Broadview was still under construction. Therefore, pro forma data for Broadview has not been provided as there is no material difference between pro forma data that give effect to the Broadview Project acquisition as if it had occurred on January 1, 2017 and actual data reported for the three and six months ended June 30, 2018 and 2017.

18


The unaudited pro forma statement of operations data below gives effect to the Japan Acquisition, as if it had occurred on January 1, 2017. The 2018 pro forma net loss was adjusted to exclude nonrecurring transaction related expenses of $1.3 million. The unaudited pro forma data is presented for illustrative purposes only and is not intended to be indicative of actual results that would have been achieved had the acquisition been consummated as of January 1, 2017. The unaudited pro forma data should not be considered representative of the Company’s future financial condition or results of operations.
Unaudited pro forma data (in thousands)
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
Pro forma total revenue
 
$
139,940

 
$
115,185

 
$
255,334

 
$
222,228

Pro forma total expenses
 
(141,714
)
 
(130,957
)
 
(269,068
)
 
(235,797
)
Pro forma net loss
 
(1,774
)
 
(15,772
)
 
(13,734
)
 
(13,569
)
Less: pro forma net loss attributable to noncontrolling interest
 
(34,492
)
 
(28,759
)
 
(182,828
)
 
(31,801
)
Pro forma net income attributable to Pattern Energy
 
$
32,718

 
$
12,987

 
$
169,094

 
$
18,232

The following table presents the amounts included in the consolidated statements of operations for the acquisitions discussed above since their respective dates of acquisition:
Unaudited data (in thousands)
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Total revenue
 
$
29,059

 
$
49,937

Total expenses
 
(26,324
)
 
(46,829
)
Net income
 
2,735

 
3,108

Less: net loss attributable to noncontrolling interest
 
(17,004
)
 
(38,577
)
Net income attributable to Pattern Energy
 
$
19,739

 
$
41,685

6.    Property, Plant and Equipment
The following presents the categories within property, plant and equipment (in thousands):
 
June 30,
 
December 31,
 
2018
 
2017
Operating wind farms
$
4,521,482

 
$
4,640,718

Transmission line
93,849

 
93,849

Furniture, fixtures and equipment
12,285

 
12,643

Land
248

 
141

Subtotal
4,627,864

 
4,747,351

Less: accumulated depreciation
(830,766
)
 
(782,230
)
Property, plant and equipment, net
$
3,797,098

 
$
3,965,121

The Company recorded depreciation expense related to property, plant and equipment of $53.8 million and $107.9 million for the three and six months ended June 30, 2018, respectively, and recorded $47.5 million and $90.5 million for the same periods in the prior year.

19


7.    Finite-Lived Intangible Assets and Liabilities and Goodwill
Finite-Lived Intangible Assets and Liabilities
The following presents the major components of the finite-lived intangible assets and liabilities (in thousands):
 
 
June 30, 2018
 
 
Weighted Average Remaining Life
 
Gross
 
Accumulated Amortization
 
Net
Intangible assets
 
 
 
 
 
 
 
 
Power purchase agreements
 
16
 
$
224,528

 
$
(23,161
)
 
$
201,367

Industrial revenue bond tax savings
 
24
 
12,778

 
(611
)
 
12,167

Other intangible assets
 
33
 
13,898

 
(1,075
)
 
12,823

Leasehold interest
 
8
 
$
67

 
$
(2
)
 
$
65

Total intangible assets
 
 
 
$
251,271

 
$
(24,849
)
 
$
226,422

Intangible liabilities
 
 
 
 
 
 
 
 
Power purchase agreement
 
14
 
$
60,300

 
$
(10,840
)
 
$
49,460

Leasehold interest
 
23
 
8,858

 
(123
)
 
8,735

Total intangible liabilities
 
 
 
$
69,158

 
$
(10,963
)
 
$
58,195


 
 
December 31, 2017
 
 
Weighted Average Remaining Life
 
Gross
 
Accumulated Amortization
 
Net
Intangible assets
 
 
 
 
 
 
 
 
Power purchase agreement
 
15
 
$
127,084

 
$
(17,611
)
 
$
109,473

Industrial revenue bond tax savings
 
24
 
12,778

 
(351
)
 
12,427

Other intangible assets
 
34
 
15,234

 
(1,086
)
 
14,148

Total intangible assets
 
 
 
$
155,096

 
$
(19,048
)
 
$
136,048

Intangible liability
 
 
 
 
 
 
 
 
Power purchase agreement
 
15
 
$
60,300

 
$
(9,106
)
 
$
51,194

The Company presents amortization of the PPA assets and PPA liabilities as an offset to electricity sales in the consolidated statements of operations, which resulted in net expense of $2.5 million and $3.9 million for the three and six months ended June 30, 2018, respectively, and net expense of $0.7 million and $1.5 million for the same periods in 2017, respectively. For other intangible assets, the Company includes the amortization in depreciation, amortization and accretion in the consolidated statements of operations and recorded amortization expense of $0.1 million and $0.2 million for the three and six months ended June 30, 2018, respectively, and amortization expense of $0.1 million and $0.2 million for the same periods in 2017, respectively.
As part of the 2017 Broadview acquisition, the Company acquired an intangible asset related to future property tax savings resulting from the issuance of industrial revenue bonds during construction of the project. The intangible asset is being amortized to depreciation, amortization and accretion in the consolidated statements of operations. The Company recorded amortization expense of $0.1 million and $0.3 million for the three and six months ended June 30, 2018, respectively, and $0.2 million and $0.2 million for the same periods in 2017, respectively, related to the industrial revenue bond tax savings intangible asset.
As a result of the Japan Acquisition, the Company recorded $103.2 million of intangible PPA assets resulting from market prices that are lower than the contractual prices. In addition, the Company recorded a $9.3 million intangible leasehold interest liability, as a result of higher market prices compared to the contractual prices, which is being amortized to depreciation, amortization and accretion in the consolidated statements of operations.

20


The following table presents estimated future amortization for the next five years related to the Company's finite-lived intangible assets and liabilities (in thousands):
Year ended December 31,
 
Power purchase agreements, net
 
Industrial revenue bond tax savings
 
Other intangible assets
 
Leasehold interests
2018 (remainder)
 
$
4,874

 
$
256

 
$
278

 
$
(189
)
2019
 
9,748

 
512

 
556

 
(379
)
2020
 
9,748

 
512

 
556

 
(379
)
2021
 
9,748

 
512

 
556

 
(379
)
2022
 
9,748

 
512

 
556

 
(379
)
Thereafter
 
108,092

 
9,862

 
10,278

 
(6,968
)
Goodwill
In connection with the Japan Acquisition the Company recognized goodwill of $60.3 million, which was allocated to the power projects reporting unit.
The following table presents a reconciliation of the beginning and ending carrying amounts of goodwill (in millions):
 
 
Total
Balances at December 31, 2017
 
$

Net additions during the period(1)
 
60.3

Balances at March 31, 2018
 
$
60.3

Foreign currency translation adjustment
 
(2.6
)
Balances at June 30, 2018
 
$
57.7

(1) 
The Company recorded goodwill on March 7, 2018 as a result of the Japan Acquisition.
8.     Variable Interest Entities
The Company consolidates variable interest entities (VIEs) in which it holds a variable interest and is the primary beneficiary. The Company has determined that Logan's Gap, Panhandle 1, Panhandle 2, Post Rock, Amazon Wind and Broadview Energy Holdings LLC (a subsidiary of Broadview Project) are VIEs. The Company determined that as the managing member of the VIEs, it is the primary beneficiary by reference to the power and benefits criterion under ASC 810, Consolidation, and therefore, consolidates VIEs. The Company considered responsibilities within the contractual agreements, which grant it the power to direct the activities of the VIE that most significantly impact the VIE's economic performance. Such activities include management of the wind farms' operations and maintenance, budgeting, policies and procedures. In addition, the Company has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs on the basis of the income allocations and cash distributions.
The Company’s equity method investment in Pattern Development 2.0 is considered to be a VIE primarily because the total equity at risk is not sufficient to permit Pattern Development 2.0 to finance its activities without additional subordinated financial support by the equity holders. The Company does not hold the power or benefits to be the primary beneficiary and does not consolidate the VIE. The carrying value of its unconsolidated investment in Pattern Development 2.0 was $107.9 million as of June 30, 2018. The Company's maximum exposure to loss is equal to the carrying value of the investment.

21


The following table summarizes the carrying amounts of major consolidated balance sheet items for consolidated VIEs as of June 30, 2018 and December 31, 2017. All assets (excluding deferred financing costs, net and finite-lived intangible assets, net) and liabilities of a consolidated VIE presented below are (1) assets that can be used only to settle obligations of the VIE or (2) liabilities for which creditors do not have recourse to the general credit of the primary beneficiary.
 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
31,395

 
$
33,273

Restricted cash
4,336

 
4,314

Trade receivables
12,759

 
12,769

Prepaid expenses
7,050

 
4,965

Other current assets
1,513

 
2,597

Deferred financing costs, net
135

150

150

Total current assets
57,188

 
58,068

 
 
 
 
Restricted cash
614

 
3,330

Property, plant and equipment, net
1,935,581

 
1,984,606

Deferred financing costs, net
1,489

 
1,549

Finite-lived intangible assets, net
11,903

 
12,210

Other assets
12,830

 
12,984

Total assets
$
2,019,605

 
$
2,072,747

 
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued liabilities
$
17,001

 
26,826

Accrued construction costs
13

 
759

Accrued interest
127

 
78

Other current liabilities
3,867

 
4,789

Total current liabilities
21,008

 
32,452

 
 
 
 
Finite-lived intangible liability, net
49,460

 
51,194

Contingent liabilities

 
87

Other long-term liabilities
56,345

 
47,345

Total liabilities
$
126,813

 
$
131,078


22


9.    Unconsolidated Investments
The Company's unconsolidated investments consist of the following for the periods presented below (in thousands):
 
 
 
 
 
Percentage of Ownership
 
June 30,
 
December 31,
 
June 30,
 
December 31,
 
2018
 
2017
 
2018
 
2017
South Kent
$
9,538

 
$
6,151

 
50.0
%
 
50.0
%
Grand
7,655

 
6,611

 
45.0
%
 
45.0
%
K2
94,894

 
103,328

 
33.3
%
 
33.3
%
Armow
123,479

 
132,890

 
50.0
%
 
50.0
%
Pattern Development 2.0
107,946


62,243

 
24.0
%

20.9
%
Unconsolidated investments
$
343,512

 
$
311,223

 
 
 
 
Pattern Development 2.0
During the six months ended June 30, 2018, the Company has funded $57.1 million into Pattern Development 2.0 of which approximately $27.0 million was used by Pattern Development 2.0 to fund the purchase of GPI. As of June 30, 2018, the Company has funded $124.4 million in aggregate and holds an approximately 24% ownership interest in Pattern Development 2.0.
Basis Amortization of Unconsolidated Investments
The cost of the Company’s investment in the net assets of unconsolidated investments was higher than the fair value of the Company’s equity interest in the underlying net assets of its unconsolidated investments. The basis differences were primarily attributable to property, plant and equipment, PPAs, and equity method goodwill. The Company amortizes the basis difference attributable to property, plant and equipment, and PPAs over their useful life and contractual life, respectively. The Company does not amortize equity method goodwill. For the three and six months ended June 30, 2018, the Company recorded basis difference amortization for its unconsolidated investments of $2.7 million and $5.4 million, respectively, and for the same periods in 2017, the Company recorded basis difference amortization of $2.8 million and $5.6 million, respectively, in earnings in unconsolidated investments, net on the consolidated statements of operations.
Significant Equity Method Investees
The following table presents summarized statements of operations information for the three and six months ended June 30, 2018 and 2017 as required for the Company's significant equity method investees, South Kent, Grand, K2, Armow and Pattern Development 2.0 pursuant to Regulation S-X Rule 10-01(b)(1) (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017(1)
 
2018
 
2017(1)
Revenue
$
70,156

 
$
82,744

 
$
179,689

 
$
183,103

Cost of revenue
29,829

 
28,149

 
60,166

 
57,738

Operating expenses
34,589

 
919

 
53,743

 
1,633

Other expense
18,833

 
15,135

 
39,684

 
37,976

Net income (loss)
$
(13,095
)
 
$
38,541

 
$
26,096

 
$
85,756

(1) 
Results for the three and six months ended June 30, 2017 do not include Pattern Development 2.0, which the Company invested in during July 2017.

23


10.    Debt
The Company’s debt consists of the following for periods presented below (in thousands):
 
 
 
 
 
As of June 30, 2018
 
June 30, 2018
 
December 31, 2017
 
Contractual Interest Rate
 
Effective Interest Rate
 
 
 
 
 
 
 
Maturity
Corporate-level
 
 
 
 
 
 
 
 
 
Revolving Credit Facility
$
201,000

 
$

 
varies

(1) 
3.78
%
(1) 
November 2022
2020 Notes
225,000

 
225,000

 
4.00
%
 
6.60
%
 
July 2020
2024 Notes
350,000

 
350,000

 
5.88
%
 
5.88
%
 
February 2024
Project-level
 
 
 
 
 
 
 
 
 
Fixed interest rate
 
 
 
 
 
 
 
 
 
El Arrayán EKF term loan (5)

 
99,112

 
 
 
 
 
 
Santa Isabel term loan
102,508

 
103,878

 
4.57
%
 
4.57
%
 
September 2033
Variable interest rate
 
 
 
 
 
 
 
 
 
Ocotillo commercial term loan
287,067

 
289,339

 
3.83
%
 
4.05
%
(3) 
June 2033
El Arrayán commercial term loan (5)

 
90,102

 
 
 
 
 
 
Spring Valley term loan
122,125

 
125,678

 
4.09
%
 
5.02
%
(3) 
 June 2030
St. Joseph term loan (2)
161,300

 
171,487

 
3.40
%
 
3.93
%
(3) 
 November 2033
Western Interconnect term loan (2)
53,060

 
54,395

 
4.34
%
 
4.33
%
(3) 
April 2027
Meikle term loan (2)
250,601

 
266,557

 
3.27
%
 
3.92
%
(3) 
May 2024
Futtsu term loan
76,312

 

 
1.07
%
 
1.85
%
(3) 
December 2033
Ohorayama term loan
98,870

 

 
0.87
%
 
0.87
%
(3) 
February 2036
Tsugaru Construction Loan
53,837

 

 
0.72
%
 
0.72
%
(3) 
March 2038
Tsugaru Holdings Loan Agreement
58,320

 

 
3.09
%
 
3.09
%
(3) 
July 2022
Imputed interest rate
 
 
 
 
 
 
 
 
 
Hatchet Ridge financing lease obligation
184,704