Pattern Energy Group Inc.
Pattern Energy Group Inc. (Form: 10-Q, Received: 11/07/2016 06:23:28)
 
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 September 30, 2016 .
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
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 November 2, 2016 , there were 87,469,506 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 SEPTEMBER 30, 2016
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 the acquisition 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 and other conditions, other weather conditions, 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 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 and other equipment;
the increased costs of, and tariffs on, spare parts;
scarcity of necessary equipment;
negative public or community response to wind 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, 2015.
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)
 
September 30,
 
December 31,

2016
 
2015
Assets



Current assets:



Cash and cash equivalents (Note 5)
$
65,733


$
94,808

Restricted cash (Note 5)
11,562


14,609

Funds deposited by counterparty
46,643

 

Trade receivables (Note 5)
39,395


45,292

Related party receivable
913


734

Derivative assets, current
19,197


24,338

Prepaid expenses (Note 5)
15,529


14,498

Deferred financing costs, current, net of accumulated amortization of $9,111 and $5,192 as of September 30, 2016 and December 31, 2015, respectively
2,117


2,121

Other current assets (Note 5)
8,445

 
6,929

Total current assets
209,534

 
203,329

Restricted cash (Note 5)
13,652


36,875

Property, plant and equipment, net of accumulated depreciation of $540,774 and $409,161 as of September 30, 2016 and December 31, 2015, respectively (Note 5)
3,182,054


3,294,620

Unconsolidated investments
87,168


116,473

Derivative assets
30,259


44,014

Deferred financing costs
4,598


4,572

Net deferred tax assets
10,280


6,804

Finite-lived intangible assets, net of accumulated amortization of $9,441 and $4,357 as of September 30, 2016 and December 31, 2015, respectively (Note 5)
92,550


97,722

Other assets (Note 5)
23,879


25,183

Total assets
$
3,653,974


$
3,829,592

 
 
 
 
Liabilities and equity



Current liabilities:



Accounts payable and other accrued liabilities (Note 5)
$
32,868


$
42,776

Accrued construction costs (Note 5)
1,155


23,565

Counterparty deposit liability
46,643

 

Related party payable
1,965


1,646

Accrued interest (Note 5)
3,071


9,035

Dividends payable
35,282


28,022

Derivative liabilities, current
14,945


14,343

Revolving credit facility
35,000


355,000

Current portion of long-term debt, net of financing costs of $3,623 and $3,671 as of September 30, 2016 and December 31, 2015, respectively
46,324


44,144

Other current liabilities (Note 5)
2,668


2,156

Total current liabilities
219,921


520,687

Long-term debt, net of financing costs of $18,515 and $22,632 as of September 30, 2016 and December 31, 2015, respectively
1,145,428


1,174,380

Convertible senior notes, net of financing costs of $4,172 and $5,014 as of September 30, 2016 and December 31, 2015, respectively
201,504


197,362

Derivative liabilities
64,837


28,659

Net deferred tax liabilities
23,303


22,183

Finite-lived intangible liability, net of accumulated amortization of $4,770 and $2,168 as of September 30, 2016 and December 31, 2015, respectively
55,530


58,132

Other long-term liabilities (Note 5)
59,234


52,427

Total liabilities
1,769,757


2,053,830

Commitments and contingencies (Note 15)


 


Equity:



Class A common stock, $0.01 par value per share: 500,000,000 shares authorized; 87,469,506 and 74,644,141 shares outstanding as of September 30, 2016 and December 31, 2015, respectively
875


747

Additional paid-in capital
1,180,512


982,814

Accumulated loss
(108,065
)

(77,159
)
Accumulated other comprehensive loss
(94,149
)

(73,325
)
Treasury stock, at cost; 68,344 and 65,301 shares of Class A common stock as of September 30, 2016 and December 31, 2015, respectively
(1,641
)

(1,577
)
Total equity before noncontrolling interest
977,532


831,500

Noncontrolling interest
906,685


944,262

Total equity
1,884,217


1,775,762

Total liabilities and equity
$
3,653,974


$
3,829,592

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 September 30,
 
Nine months ended September 30,
 
2016

2015
 
2016
 
2015
Revenue:



 
 
 
 
Electricity sales
$
89,919


$
88,256

 
$
266,952

 
$
235,252

Related party revenue
1,574


955

 
4,121

 
2,630

Other revenue
421


486

 
1,918

 
1,352

Total revenue
91,914


89,697

 
272,991

 
239,234

Cost of revenue:



 
 
 
 
Project expense
31,384


28,848

 
96,989

 
82,075

Depreciation and accretion
43,693


38,599

 
130,782

 
101,997

Total cost of revenue
75,077


67,447

 
227,771

 
184,072

Gross profit
16,837


22,250

 
45,220

 
55,162

Operating expenses:



 
 
 
 
General and administrative
11,191


7,218

 
31,122

 
22,309

Related party general and administrative
3,553


1,887

 
7,381

 
5,316

Total operating expenses
14,744


9,105

 
38,503

 
27,625

Operating income
2,093


13,145

 
6,717

 
27,537

Other income (expense):



 
 
 
 
Interest expense
(19,798
)

(19,941
)
 
(62,134
)
 
(56,802
)
Gain (loss) on undesignated derivatives, net
1,825


(6,091
)
 
(17,685
)
 
(5,313
)
Realized loss on designated derivatives


(11,221
)
 

 
(11,221
)
Earnings (loss) in unconsolidated investments, net
4,685


(9,951
)
 
15,755

 
768

Related party income
1,593


605

 
3,697

 
2,029

Early extinguishment of debt


(4,113
)
 

 
(4,113
)
Net loss on transactions
(314
)

(74
)
 
(353
)
 
(2,663
)
Other income (expense), net
177


128

 
2,297

 
(1,280
)
Total other expense
(11,832
)

(50,658
)
 
(58,423
)
 
(78,595
)
Net loss before income tax
(9,739
)

(37,513
)
 
(51,706
)
 
(51,058
)
Tax (benefit) provision
1,311


(2,181
)
 
4,038

 
676

Net loss
(11,050
)

(35,332
)
 
(55,744
)
 
(51,734
)
Net loss attributable to noncontrolling interest
(7,037
)

(5,927
)
 
(24,838
)
 
(16,747
)
Net loss attributable to Pattern Energy
$
(4,013
)

$
(29,405
)
 
$
(30,906
)
 
$
(34,987
)
 
 
 
 
 
 
 
 
Weighted average number of shares:



 
 
 
 
Class A common stock - Basic and diluted
81,531,775

 
72,789,583

 
76,821,811

 
69,233,698

Loss per share
 
 
 
 
 
 
 
Class A common stock:
 
 
 
 
 
 
 
Basic and diluted loss per share
$
(0.05
)
 
$
(0.40
)
 
$
(0.40
)
 
$
(0.51
)
Dividends declared per Class A common share
$
0.40

 
$
0.36

 
$
1.17

 
$
1.06


See accompanying notes to consolidated financial statements.

6


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

 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(11,050
)
 
$
(35,332
)
 
$
(55,744
)
 
$
(51,734
)
Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation, net of zero tax impact
(1,768
)
 
(12,208
)
 
9,874

 
(21,900
)
Derivative activity:
 
 
 
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax benefit of $198, $892, $4,300 and $948, respectively
(329
)
 
(15,600
)
 
(30,990
)
 
(16,257
)
Reclassifications to net loss due to termination/de-designation of interest rate derivatives, net of zero tax impact

 
11,221

 

 
11,221

Reclassifications to net loss, net of tax impact of $284, $170, $867 and $511, respectively
2,736

 
2,590

 
8,359

 
9,546

Total change in effective portion of change in fair market value of derivatives
2,407

 
(1,789
)
 
(22,631
)
 
4,510

Proportionate share of equity investee’s derivative activity:
 
 
 
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax benefit of $244, $1,627, $4,213 and $2,486, respectively
(676
)
 
(4,513
)
 
(11,684
)
 
(6,895
)
Reclassifications to net loss, net of tax impact of $70, $194, $992 and $571, respectively
195

 
537

 
2,752

 
1,582

Total change in effective portion of change in fair market value of derivatives
(481
)
 
(3,976
)
 
(8,932
)
 
(5,313
)
Total other comprehensive income (loss), net of tax
158

 
(17,973
)
 
(21,689
)
 
(22,703
)
Comprehensive loss
(10,892
)
 
(53,305
)
 
(77,433
)
 
(74,437
)
Less comprehensive loss attributable to noncontrolling interest:
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interest
(7,037
)
 
(5,927
)
 
(24,838
)
 
(16,747
)
Derivative activity:
 
 
 
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax (provision) benefit of ($35), $268, $472 and $285, respectively
164

 
(1,023
)
 
(1,206
)
 
(2,008
)
Reclassifications to net loss, net of tax impact of $39, $51, $126 and $153, respectively
106

 
138

 
341

 
1,959

Total change in effective portion of change in fair market value of derivatives
270

 
(885
)
 
(865
)
 
(49
)
Comprehensive loss attributable to noncontrolling interest
(6,767
)
 
(6,812
)
 
(25,703
)
 
(16,796
)
Comprehensive loss attributable to Pattern Energy
$
(4,125
)
 
$
(46,493
)
 
$
(51,730
)
 
$
(57,641
)
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 Loss
 
Accumulated Other Comprehensive Loss
 
Total
 
Noncontrolling Interest
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances at December 31, 2014
62,088,306

 
$
621

 
(25,465
)
 
$
(717
)
 
$
723,938

 
$
(44,626
)
 
$
(45,068
)
 
$
634,148

 
$
530,586

 
$
1,164,734

Issuance of Class A common stock, net of issuance costs
12,435,000

 
124

 

 

 
316,848

 

 

 
316,972

 

 
316,972

Issuance of Class A common stock under equity incentive award plan
186,136

 
2

 

 

 
(2
)
 

 

 

 

 

Repurchase of shares for employee tax withholding

 

 
(12,027
)
 
(331
)
 

 

 

 
(331
)
 

 
(331
)
Stock-based compensation

 

 

 

 
3,234

 

 

 
3,234

 

 
3,234

Dividends declared

 

 

 

 
(75,117
)
 

 

 
(75,117
)
 

 
(75,117
)
Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(4,382
)
 
(4,382
)
Acquisition of Post Rock

 

 

 

 

 

 

 

 
205,100

 
205,100

Conversion option of convertible senior notes, net of issuance costs

 

 

 

 
23,754

 

 

 
23,754

 

 
23,754

Buyout of noncontrolling interests

 

 

 

 
16,715

 

 
(7,944
)
 
8,771

 
(95,047
)
 
(86,276
)
Contribution from noncontrolling interests

 

 

 

 

 

 

 

 
191,251

 
191,251

Other

 

 

 

 
11

 

 

 
11

 

 
11

Net loss

 

 

 

 

 
(34,987
)
 

 
(34,987
)
 
(16,747
)
 
(51,734
)
Other comprehensive loss, net of tax

 

 

 

 

 

 
(22,654
)
 
(22,654
)
 
(49
)
 
(22,703
)
Balances at September 30, 2015
74,709,442

 
$
747

 
(37,492
)
 
$
(1,048
)
 
$
1,009,381

 
$
(79,613
)
 
$
(75,666
)
 
$
853,801

 
$
810,712

 
$
1,664,513

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

8


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 Loss
 
Accumulated Other Comprehensive Loss
 
Total
 
Noncontrolling Interest
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances at December 31, 2015
74,709,442

 
$
747

 
(65,301
)
 
$
(1,577
)
 
$
982,814

 
$
(77,159
)
 
$
(73,325
)
 
$
831,500

 
$
944,262

 
$
1,775,762

Issuance of Class A common stock, net of issuance costs
12,540,504

 
125

 

 

 
286,115

 

 

 
286,240

 

 
286,240

Issuance of Class A common stock under equity incentive award plan
287,904

 
3

 

 

 
(3
)
 

 

 

 

 

Repurchase of shares for employee tax withholding

 

 
(3,043
)
 
(64
)
 

 

 

 
(64
)
 

 
(64
)
Stock-based compensation

 

 

 

 
4,362

 

 

 
4,362

 

 
4,362

Dividends declared

 

 

 

 
(92,818
)
 

 

 
(92,818
)
 

 
(92,818
)
Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(11,771
)
 
(11,771
)
Other

 

 

 

 
42

 

 

 
42

 
(103
)
 
(61
)
Net loss

 

 

 

 

 
(30,906
)
 

 
(30,906
)
 
(24,838
)
 
(55,744
)
Other comprehensive loss, net of tax

 

 

 

 

 

 
(20,824
)
 
(20,824
)
 
(865
)
 
(21,689
)
Balances at September 30, 2016
87,537,850

 
$
875

 
(68,344
)
 
$
(1,641
)
 
$
1,180,512

 
$
(108,065
)
 
$
(94,149
)
 
$
977,532

 
$
906,685

 
$
1,884,217


See accompanying notes to consolidated financial statements.

9


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

 
Nine months ended September 30,

2016

2015
Operating activities



Net loss
$
(55,744
)

$
(51,734
)
Adjustments to reconcile net loss to net cash provided by operating activities:




Depreciation and accretion
130,782


102,108

Amortization of financing costs
5,242


5,581

Amortization of debt discount/premium, net
3,147


798

Amortization of power purchase agreements, net
2,278


1,175

Loss on derivatives, net
29,757


793

Stock-based compensation
4,362


3,234

Deferred taxes
3,681


340

Earnings in unconsolidated investments
(15,755
)

(813
)
Distributions from unconsolidated investments
377

 

Realized loss on derivatives, net

 
10,192

Early extinguishment of debt

 
3,958

Other reconciling items
44


1,221

Changes in operating assets and liabilities:





Funds deposited by counterparty
(46,643
)


Trade receivables
6,078


5,657

Prepaid expenses
(1,005
)
 
3,994

Other current assets
(3,554
)

(6,583
)
Other assets (non-current)
865


(2,022
)
Accounts payable and other accrued liabilities
(2,658
)

4,180

Counterparty deposit liability
46,643



Related party receivable/payable
164


506

Accrued interest
(6,017
)

1,970

Other current liabilities
492


764

Long-term liabilities
4,835

 
83

Increase in restricted cash
(1,972
)
 
(2,120
)
Net cash provided by operating activities
105,399


83,282

Investing activities



Cash paid for acquisitions, net of cash acquired
(4,024
)
 
(406,284
)
Decrease in restricted cash
23,293


41,820

Increase in restricted cash
(79
)

(33,890
)
Capital expenditures
(31,554
)

(315,954
)
Distributions from unconsolidated investments
40,066


23,494

Other assets
1,619

 
4,650

Other investing activities
(136
)


Net cash provided by (used in) investing activities
29,185


(686,164
)

10


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

 
Nine months ended September 30,

2016

2015
Financing activities



Proceeds from public offering, net of issuance costs
$
286,583


$
317,822

Proceeds from issuance of convertible senior notes, net of issuance costs

 
219,557

Repurchase of shares for employee tax withholding
(64
)

(331
)
Dividends paid
(85,159
)

(63,455
)
Payment for deferred equity issuance costs

 
(1,940
)
Buyout of noncontrolling interest

 
(121,224
)
Capital contributions - noncontrolling interest

 
193,064

Capital distributions - noncontrolling interest
(11,771
)

(4,382
)
Decrease in restricted cash
41,054


41,429

Increase in restricted cash
(36,027
)

(41,184
)
Refund of deposit for letters of credit


3,425

Payment for deferred financing costs
(134
)
 
(8,445
)
Proceeds from revolving credit facility
20,000


295,000

Repayment of revolving credit facility
(340,000
)

(100,000
)
Proceeds from construction loans


294,502

Repayment of long-term debt
(39,322
)

(405,036
)
Payment for interest rate derivatives

 
(11,061
)
Other financing activities
(569
)


Net cash provided by (used in) financing activities
(165,409
)

607,741

Effect of exchange rate changes on cash and cash equivalents
1,750


(3,319
)
Net change in cash and cash equivalents
(29,075
)

1,540

Cash and cash equivalents at beginning of period
94,808


101,656

Cash and cash equivalents at end of period
$
65,733


$
103,196

Supplemental disclosures



Cash payments for income taxes
$
233


$
293

Cash payments for interest expense, net of capitalized interest
59,172


49,239

Acquired property, plant and equipment from acquisitions

 
579,712

Schedule of non-cash activities





Change in property, plant and equipment
6,132


20,744

Non-cash increase in additional paid-in capital from buyout of noncontrolling interests


16,715

Equity issuance costs paid in prior period related to current period offerings


433


See accompanying notes to consolidated financial statements.

11


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 located in the United States, Canada and Chile. Pattern Development owns a 19% interest in the Company. Pattern Development is a leading developer of renewable energy and transmission projects.
The Company consists of the consolidated operations of certain entities and assets contributed by, or purchased principally from, Pattern Development, 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 projects are consolidated into the Company's subsidiaries which are organized by geographic location 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 Pattern Panhandle Wind LLC (Panhandle 1), Pattern Panhandle Wind 2 LLC (Panhandle 2), Post Rock Wind Power Project, LLC (Post Rock), Logan's Gap Wind LLC (Logan's Gap) and Fowler Ridge IV Wind Farm LLC (Amazon Wind Farm Fowler Ridge));
Pattern Canada Operations Holdings ULC (which consists primarily of 100% ownership of St. Joseph Windfarm Inc. (St. Joseph) and noncontrolling interests in South Kent Wind LP (South Kent), Grand Renewable Wind LP (Grand) and K2 Wind Ontario Limited Partnership (K2), which are accounted for as equity method investments); and
Pattern Chile Holdings LLC (which includes a controlling interest in Parque Eólico El Arrayán SpA (El Arrayán)).
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.
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 presentation of the Company’s financial position at September 30, 2016 , the results of operations and comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015 , respectively, and the cash flows for the nine months ended September 30, 2016 and 2015 , respectively. The consolidated balance sheet at December 31, 2015 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, 2015 .
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.

12


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.
Funds Deposited by Counterparty
As a result of a counterparty's credit rating downgrade, the Company received cash collateral related to an energy derivative agreement, as discussed in Note 10 , Derivative Instruments . The Company does not have the right to pledge, invest, or use the cash collateral for general corporate purposes. As of September 30, 2016 , the Company has recorded a current asset of $46.6 million to funds deposited by counterparty and a current liability of $46.6 million to counterparty deposit liability representing the cash collateral received and corresponding obligation to return the cash collateral, respectively. The cash was deposited into a separate custodial account for which the Company is not entitled to the interest earned on the cash collateral.
Recently Issued Accounting Standards
In addition to 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, 2015 , the Company is evaluating or has adopted the following recently issued accounting standards.
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which provides guidance on specific cash flow issues. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2016-15 during the third quarter of fiscal 2016 did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires the measurement of all expected credit losses for financial assets including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the future impact of this update on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09, which creates FASB Accounting Standards Codification (ASC) Topic 606 , Revenue from Contracts with Customers and supersedes ASC Topic 605, Revenue Recognition (ASU 2014-09). The guidance replaces industry-specific guidance and establishes a single five-step model to identify and recognize revenue. The core principle of the guidance is that an entity should recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires the 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. The effective date of ASU 2014-09 was deferred by the issuance of ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date , (Topic 606) by one year to make the guidance of ASU 2014-09 effective for annual reporting periods beginning after December 15, 2017, including interim periods therein. Early adoption is permitted, but not prior to the original effective date, which was for annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU 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 2014-09. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers ( Topic 606 ) Identifying Performance Obligations and Licensing, which clarifies two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas, as updated by ASU 2014-09. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (ASU 2016-12), which makes narrow scope amendments to Topic 606 including implementation issues on collectability, non-cash consideration and completed contracts at transition. The Company is currently assessing the future impact of this guidance on its consolidated financial statements and related disclosures and expects to adopt these updates beginning January 1, 2018.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which simplifies several aspects of the accounting for share-based payment

13


award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is currently assessing the future impact of this update on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (ASU 2016-05), which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria remain intact. ASU 2016-05 is effective for annual periods beginning after December 15, 2017, including interim reporting periods therein, with early adoption permitted. The adoption of ASU 2016-05 on January 1, 2016 had no impact on the Company's consolidated financial statements and related disclosures.
In September 2015, the FASB issued ASU 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16), which requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments under ASU 2015-16 require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 also requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods, if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those fiscal years. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The adoption of ASU 2015-16 on January 1, 2016 did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In February 2015, the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis (ASU 2015-02), which modifies the analysis that companies must perform in order to determine whether a legal entity should be consolidated. ASU 2015-02 simplifies current guidance by reducing the number of consolidation models; eliminating the risk that a reporting entity may have to consolidate based on a fee arrangement with another legal entity; placing more weight on the risk of loss in order to identify the party that has a controlling financial interest; reducing the number of instances that related party guidance needs to be applied when determining the party that has a controlling financial interest; and changing rules for companies in certain industries that ordinarily employ limited partnership or variable interest entity (VIE) structures. ASU 2015-02 is effective for public companies for fiscal years beginning after December 15, 2015 and interim periods within those fiscal periods. The adoption of ASU 2015-02 in the quarter ended March 31, 2016 resulted in certain entities formerly consolidated under the voting interest consolidation model to be consolidated in accordance with the variable interest model as further described in Note 5, Variable Interest Entities. The adoption of ASU 2015-02 did not result in the deconsolidation of any previously consolidated entities or the consolidation of any previously unconsolidated entities and had no impact on the Company's results of operations, and cash flows.
In June 2014, the FASB issued ASU 2014-12, Compensation – Stock Compensation (ASU 2014-12), which requires an entity to treat a performance target that affects vesting that could be achieved after an employee completes the requisite service period as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. ASU 2014-12 is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted either prospectively or retrospectively to all prior periods presented. The adoption of ASU 2014-12 on January 1, 2016 had no impact on the Company's consolidated financial statements and related disclosures.
3.      Acquisitions
On May 15, 2015, pursuant to a Purchase and Sale Agreement, the Company acquired 100% of the membership interests in Lost Creek Wind Finco, LLC (Lost Creek Finco) from Wind Capital Group LLC, an unrelated third party, and 100% of the membership interests in Lincoln County Wind Project Holdco, LLC (Lincoln County Holdco) from Lincoln County Wind Project Finco, LLC, an unrelated third party. Lost Creek Finco owns 100% of the Class B membership interests in Lost Creek Wind Holdco, LLC (Lost

14


Creek Wind Holdco), a company which owns a 100% interest in the Lost Creek wind project. Lincoln County Holdco owns 100% of the Class B membership interests in Post Rock Wind Power Project, LLC, a company which owns a 100% interest in the Post Rock wind project. The acquisition of 100% of the membership interests in Lost Creek Finco and Lincoln County Holdco was for an aggregate consideration of approximately $242.0 million , paid at closing. The Company also assumed certain project level indebtedness and ordinary course performance guarantees securing project obligations. Lost Creek is a 150 MW wind project in King City, Missouri, and Post Rock is a 201 MW wind project in Ellsworth and Lincoln Counties, Kansas.
The Company acquired assets and operating contracts for Lost Creek and Post Rock, including assumed liabilities. The identifiable assets and liabilities assumed were recorded at their fair values, which corresponded to the sum of the cash purchase price and the fair value of the other investors’ noncontrolling interests. The accounting for the Lost Creek and Post Rock acquisitions is final.
Supplemental pro forma data
The unaudited pro forma statement of operations data below gives effect to the Lost Creek and Post Rock acquisitions as if they had occurred on January 1, 2014. The pro forma net income (loss) for the three and nine month periods ended September 30, 2015 was adjusted to exclude nonrecurring transaction related credits of $0.2 million and expenses of $1.7 million , respectively. 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 these acquisitions been consummated as of January 1, 2014. The unaudited pro forma data should not be considered representative of the Company’s future financial condition or results of operations.
 
 
Three months ended
 
Nine months ended
Unaudited pro forma data (in thousands)
 
September 30, 2015
 
September 30, 2015
Pro forma total revenue
 
$
89,697

 
$
260,497

Pro forma total expenses
 
125,261

 
315,976

Pro forma net loss
 
(35,564
)
 
(55,479
)
Less: pro forma net loss attributable to noncontrolling interest
 
(5,927
)
 
(23,539
)
Pro forma net loss attributable to Pattern Energy
 
$
(29,637
)
 
$
(31,940
)
The following table presents the amounts included in the consolidated statements of operations for Lost Creek and Post Rock since their respective dates of acquisition:
 
 
Three months ended
 
Nine months ended
Unaudited data (in thousands)

 
September 30, 2015
 
September 30, 2015
Total revenue
 
$
10,081

 
$
15,253

Total expenses
 
15,197

 
21,547

Net loss
 
(5,116
)
 
(6,294
)
Less: net loss attributable to noncontrolling interest
 
(1,965
)
 
(2,765
)
Net loss attributable to Pattern Energy
 
$
(3,151
)
 
$
(3,529
)

15


4.      Property, Plant and Equipment
The table below presents the categories within property, plant and equipment as follows (in thousands):
 
September 30,
 
December 31,
 
2016
 
2015
Operating wind farms
$
3,713,775

 
$
3,700,140

Furniture, fixtures and equipment
8,912

 
3,500

Land
141

 
141

Subtotal
3,722,828

 
3,703,781

Less: accumulated depreciation
(540,774
)
 
(409,161
)
Property, plant and equipment, net
$
3,182,054

 
$
3,294,620

The Company recorded depreciation expense related to property, plant and equipment of $43.0 million and $128.7 million for the three and nine months ended September 30, 2016 , respectively, and recorded $38.1 million and $100.6 million for the same periods in the prior year.
5.      Variable Interest Entities
As of January 1, 2016, certain operating entities that were formerly consolidated under the voting interest consolidation model are now consolidated in accordance with the VIE consolidation model as a result of the adoption of ASU 2015-02 as further discussed in Note 2, Summary of Significant Accounting Policies .
The operating entities determined to be VIEs by the Company are Logan's Gap, Panhandle 1, Panhandle 2, Post Rock and Amazon Wind Farm Fowler Ridge primarily because the tax equity interests lack substantive kick-out and participating rights. The Company determined that as the managing member it is the primary beneficiary of each VIE by reference to the power and benefits criterion under ASC 810, Consolidation . 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.

16


The following presents the carrying amounts of the consolidated VIEs' assets and liabilities included in the consolidated balance sheet (in thousands). Assets presented below are restricted for settlement of the consolidated VIEs' obligations and all liabilities presented below can only be settled using the VIE resources.
 
September 30, 2016
Assets
 
Current assets:
 
Cash and cash equivalents
$
12,433

Restricted cash
4,289

Trade receivables
3,953

Prepaid expenses
3,919

Other current assets
1,771

Total current assets
26,365

Restricted cash
3,202

Property, plant and equipment, net
1,443,557

Finite-lived intangible assets, net
2,113

Other assets
16,155

Total assets
$
1,491,392

 
 
Liabilities
 
Current liabilities:
 
Accounts payable and other accrued liabilities
$
8,919

Accrued construction costs
754

Accrued interest
127

Other current liabilities
1,481

Total current liabilities
11,281

Other long-term liabilities
15,675

Total liabilities
$
26,956

6.      Unconsolidated Investments
The following projects are accounted for under the equity method of accounting and are presented in the Company's consolidated balance sheets for the periods below (in thousands):
 
 
 
 
 
Percentage of Ownership
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
2016
 
2015
 
2016
 
2015
South Kent (1)
$

 
$
6,185

 
50.0
%
 
50.0
%
Grand (1)

 
5,735

 
45.0
%
 
45.0
%
K2
87,168

 
104,553

 
33.3
%
 
33.3
%
Unconsolidated investments
$
87,168

 
$
116,473

 
 
 
 
(1) As of September 30, 2016 , the equity method investment balances in South Kent and Grand were $0 . In accordance with ASC 323, Investments - Equity Method and Joint Ventures, the Company has suspended recognition of South Kent's and Grand's equity method earnings or losses and accumulated other comprehensive income (loss), if applicable, until such time as South Kent's and Grand's subsequent cumulative equity method earnings and other comprehensive income exceed cumulative distributions received, cumulative equity method losses and, where applicable, cumulative other comprehensive income (loss) during the suspension period. During the periods when South Kent's and Grand's equity method earnings or losses are suspended, the Company will record cash distributions received as gains in earnings (losses) in unconsolidated investments, net on the Company's consolidated statements of operations.

17


The following table summarizes the components of suspension during the period which are included in earnings (loss) in unconsolidated investments, net on the Company's consolidated statements of operations and components of suspension included in other comprehensive income (loss) (in thousands):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2016
 
2016
Earnings (loss) in unconsolidated investments, net
 
 
 
 
Gains on distributions from unconsolidated investments
 
$
5,777

 
$
15,017

Suspended equity losses
 
$
2,662

 
$
4,556

Suspended other comprehensive income
 
$
(535
)
 
$
(659
)
The following table summarizes the aggregated operating results of the unconsolidated investments for the three and nine months ended September 30, 2016 and 2015 , respectively (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
40,863

 
$
35,697

 
$
167,426

 
$
122,483

Cost of revenue
21,552

 
20,444

 
62,561

 
48,120

Operating expenses
2,675

 
3,133

 
8,734

 
8,447

Other expense
21,553

 
31,476

 
89,820

 
59,925

Net income (loss)
$
(4,917
)
 
$
(19,356
)
 
$
6,311

 
$
5,991

Significant Equity Method Investee
The following table presents summarized statements of operations information for the three and nine months ended September 30, 2016 and 2015 , in thousands, as required for the Company's significant equity method investee, South Kent, pursuant to Regulation S-X Rule 10-01 (b)(1):
South Kent
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
15,128

 
$
17,137

 
$
65,033

 
$
69,883

Cost of revenue
7,888

 
8,518

 
22,663

 
23,640

Operating expenses
879

 
1,056

 
2,916

 
3,763

Other expense
7,319

 
19,727

 
40,276

 
39,159

Net income (loss)
$
(958
)
 
$
(12,164
)
 
$
(822
)
 
$
3,321


18


7.      Accounts Payable and Other Accrued Liabilities
The following table presents the components of accounts payable and other accrued liabilities (in thousands):
 
September 30, 2016
 
December 31,
2015
Accounts payable
$
1,848

 
$
625

Other accrued liabilities
9,420

 
9,583

Operating wind farm upgrade liability
1,012

 
4,909

Turbine operations and maintenance payable
836

 
985

Purchase agreement obligations

 
5,749

Land lease rent payable
1,396

 
2,513

Spare-parts inventory payables
550

 
1,181

Payroll liabilities
6,268

 
5,345

Property tax payable
10,391

 
11,145

Sales tax payable
1,147

 
741

Accounts payable and other accrued liabilities
$
32,868

 
$
42,776

8.      Revolving Credit Facility
As of September 30, 2016 , $433.3 million was available for borrowing under the $500.0 million Revolving Credit Facility. The Revolving Credit Facility is secured by pledges of the capital stock and ownership interests in certain of the Company’s holding company subsidiaries. The Revolving Credit Facility contains a broad range of covenants that, subject to certain exceptions, restrict the Company’s holding company subsidiaries' ability to incur debt, grant liens, sell or lease assets, transfer equity interests, dissolve, pay distributions and change its business. As of September 30, 2016 , the Company's holding company subsidiaries were in compliance with covenants contained in the Revolving Credit Facility.
As of September 30, 2016 and December 31, 2015 , outstanding loan balances under the Revolving Credit Facility were $35.0 million and $355.0 million , respectively. In addition, as of September 30, 2016 and December 31, 2015 , letters of credit of $31.7 million and $27.2 million , respectively, were issued under the Revolving Credit Facility.

19


9.      Long-term Debt
The Company’s long-term debt for the following periods is presented below (in thousands):
 
 
 
 
 
As of September 30, 2016
 
September 30,
 
December 31,
 
Contractual Interest Rate
 
Effective Interest Rate
 
Maturity
 
2016
 
2015
 
 
 
Project-level
 
 
 
 
 
 
 
 
 
Fixed interest rate
 
 
 
 
 
 
 
 
 
El Arrayán EKF term loan
$
103,904

 
$
107,160

 
5.56
%
 
5.56
%
 
March 2029
Santa Isabel term loan
107,656

 
109,973

 
4.57
%
 
4.57
%
 
September 2033
Variable interest rate
 
 
 
 
 
 
 
 
 
Ocotillo commercial term loan (1)
194,378

 
208,119

 
2.59
%
 
3.79
%
(2)  
August 2020
Lost Creek term loan
103,846

 
110,846

 
2.89
%
 
6.50
%
(2)  
September 2027
El Arrayán commercial term loan
94,458

 
97,418

 
3.98
%
 
5.69
%
(2)  
March 2029
Spring Valley term loan
131,409

 
132,670

 
2.59
%
 
5.31
%
(2)  
June 2030
Ocotillo development term loan
103,400

 
104,500

 
2.94
%
 
4.39
%
(2)  
August 2033
St. Joseph term loan (1)
166,431

 
158,181

 
2.52
%
 
3.84
%
(2)  
November 2033
Imputed interest rate
 
 
 
 
 
 
 
 
 
Hatchet Ridge financing lease obligation
207,181

 
214,580

 
1.43
%
 
1.43
%
 
December 2032
 
1,212,663

 
1,243,447

 
 
 
 
 
 
Unamortized premium, net  (3)
1,227

 
1,380

 
 
 
 
 
 
Unamortized financing costs
(22,138
)
 
(26,303
)
 
 
 
 
 
 
Current portion (4)
(46,324
)
 
(44,144
)
 
 
 
 
 
 
Long-term debt, less current portion
$
1,145,428

 
$
1,174,380

 
 
 
 
 
 
(1)  
The amortization for the Ocotillo commercial term loan and the St. Joseph term loan are through June 2030 and September 2036, respectively, which differs from the stated maturity date of such loans due to prepayment requirements.
(2)  
Includes impact of interest rate derivatives. Refer to Note 10 , Derivative Instruments , for discussion of interest rate derivatives.
(3)  
Amount is related to the Lost Creek term loan.
(4)  
Amount is presented net of the current portion of unamortized financing costs of $ 3.6 million and $ 3.7 million as of September 30, 2016 and December 31, 2015 , respectively.
Interest and commitment fees incurred and interest expense for long-term debt, the Revolving Credit Facility, Convertible Senior Notes and other finance related interest expense consisted of the following (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Interest and commitment fees incurred
$
16,854

 
$
19,144

 
$
53,356

 
$
55,682

Capitalized interest, commitment fees, and letter of credit fees

 
(2,083
)
 

 
(5,656
)
Amortization of debt discount/premium, net
1,073

 
830

 
3,147

 
798

Amortization of financing costs
1,745

 
1,916

 
5,242

 
5,581

Other interest
126

 
134

 
389

 
397

Interest expense
$
19,798

 
$
19,941

 
$
62,134

 
$
56,802

Convertible Senior Notes due 2020
In July 2015, the Company issued $225.0 million aggregate principal amount of 4.00% convertible senior notes due 2020 (Convertible Senior Notes or 2020 Notes). The 2020 Notes bear interest at a rate of 4.00% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2016. The 2020 Notes will mature on July 15, 2020. The 2020 Notes were sold in a private placement.

20


The following table presents a summary of the equity and liability components of the 2020 Notes (in thousands):
 
September 30, 2016
 
December 31,
2015
Principal
$
225,000

 
$
225,000

Less:

 

Unamortized debt discount
(19,324
)
 
(22,624
)
Unamortized financing costs
(4,172
)
 
(5,014
)
Carrying value of convertible senior notes
$
201,504

 
$
197,362

Carrying value of the equity component (1)
$
23,743

 
$
23,743

(1)  
Included in the consolidated balance sheets within additional paid-in capital, net of $0.7 million in equity issuance costs.
During the three and nine months ended September 30, 2016 , in relation to the 2020 Notes, the Company recorded contractual coupon interest of $2.4 million and $6.9 million , amortization of financing costs of $0.3 million and $0.8 million and amortization of debt discount of $1.1 million and $3.3 million , respectively, in interest expense in the consolidated statements of operations.
10.      Derivative Instruments
The Company employs a variety of derivative instruments to manage its exposure to fluctuations in electricity prices, interest rates and foreign currency exchange rates. Energy prices are subject to wide swings as supply and demand are impacted by, among many other unpredictable items, weather, market liquidity, generating facility availability, customer usage, storage, and transmission and transportation constraints. Interest rate risk exists primarily on variable-rate debt for which the cash flows vary based upon movement in market prices. Additionally, the Company is exposed to foreign currency exchange rate risk primarily from its business operations in Canada and Chile. The Company’s objectives for holding these derivative instruments include reducing, eliminating and efficiently managing the economic impact of these exposures as effectively as possible. The Company does not hedge all of its electricity price risk, interest rate risks, and foreign currency exchange rate risks, thereby exposing the unhedged portions to changes in market prices.
As of September 30, 2016 , the Company had other energy-related contracts that did not meet the definition of a derivative instrument or qualified for the normal purchase normal sale scope exception and were therefore exempt from fair value accounting treatment.

21


The following tables present the fair values of the Company's derivative instruments on a gross basis as reflected on the Company’s consolidated balance sheets (in thousands):
 
 
September 30, 2016
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Current
 
Long-Term
 
Current
 
Long-Term
Fair Value of Designated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$

 
$
10,293

 
$
50,166

 
 
 
 
 
 
 
 
 
Fair Value of Undesignated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$

 
$
3,957

 
$
14,605

Energy derivative
 
18,457

 
30,256

 

 

Foreign currency forward contracts
 
740

 
3

 
695

 
66

 
 
 
 
 
 
 
 
 
Total Fair Value
 
$
19,197

 
$
30,259

 
$
14,945

 
$
64,837

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Current
 
Long-Term
 
Current
 
Long-Term
Fair Value of Designated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$

 
$
10,034

 
$
24,360

 
 
 
 
 
 
 
 
 
Fair Value of Undesignated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
559

 
$
4,309

 
$
4,299

Energy derivative
 
20,856

 
42,827

 

 

Foreign currency forward contracts
 
3,482

 
628

 

 

 
 
 
 
 
 
 
 
 
Total Fair Value
 
$
24,338

 
$
44,014

 
$
14,343

 
$
28,659

The following table summarizes the notional amounts of the Company's outstanding derivative instruments (in thousands except for MWh):
 
 
Unit of Measure
 
September 30,
 
December 31,
 
 
 
2016
 
2015
Designated Derivative Instruments
 
 
 
 
 
 
Interest rate swaps
 
USD
 
$
367,824

 
$
379,808

Interest rate swaps
 
CAD
 
$
196,650

 
$
196,988

 
 
 
 
 
 
 
Undesignated Derivative Instruments