Pattern Energy Group Inc.
Pattern Energy Group Inc. (Form: 10-Q, Received: 08/09/2017 15:21:56)
 
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, 2017 .
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 4, 2017 there were 87,637,816 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, 2017
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 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, 2016 .
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,

2017
 
2016
Assets

 

Current assets:

 

Cash and cash equivalents (Note 6)
$
162,600

 
$
83,932

Restricted cash (Note 6)
13,137

 
11,793

Funds deposited by counterparty
34,436

 
43,635

Trade receivables (Note 6)
48,331

 
37,510

Derivative assets, current
18,680

 
17,578

Prepaid expenses (Note 6)
11,787

 
13,803

Deferred financing costs, current, net of accumulated amortization of $10,606 and $9,350 as of June 30, 2017 and December 31, 2016, respectively
2,461

 
2,456

Other current assets (Note 6)
12,658

 
7,350

Total current assets
304,090

 
218,057

Restricted cash (Note 6)
17,410

 
13,646

Property, plant and equipment, net (Note 6)
3,682,269

 
3,135,162

Unconsolidated investments
240,561

 
233,294

Derivative assets
16,058

 
26,712

Deferred financing costs
4,023

 
4,052

Net deferred tax assets
4,387

 
5,559

Finite-lived intangible assets, net (Note 6)
110,617

 
91,895

Other assets (Note 6)
24,864

 
24,390

Total assets
$
4,404,279

 
$
3,752,767

Liabilities and equity

 

Current liabilities:

 

Accounts payable and other accrued liabilities (Note 6)
$
64,974

 
$
31,305

Accrued construction costs (Note 6)
4,146

 
1,098

Counterparty deposit liability
34,436

 
43,635

Accrued interest (Note 6)
18,222

 
9,545

Dividends payable
36,991

 
35,960

Derivative liabilities, current
11,340

 
11,918

Revolving credit facility
60,000

 
180,000

Current portion of long-term debt, net
54,975

 
48,716

Other current liabilities (Note 6)
9,121

 
4,698

Total current liabilities
294,205

 
366,875

Long-term debt, net
1,711,670

 
1,334,956

Derivative liabilities
24,171

 
24,521

Net deferred tax liabilities
43,559

 
31,759

Finite-lived intangible liability, net
52,929

 
54,663

Contingent liabilities
58,346

 
576

Other long-term liabilities (Note 6)
91,685

 
60,673

Total liabilities
2,276,565

 
1,874,023

Commitments and contingencies (Note 15)


 


Equity:

 

Class A common stock, $0.01 par value per share: 500,000,000 shares authorized; 87,637,816 and 87,410,687 shares outstanding as of June 30, 2017 and December 31, 2016, respectively
878

 
875

Additional paid-in capital
1,075,448

 
1,145,760

Accumulated loss
(74,397
)
 
(94,270
)
Accumulated other comprehensive loss
(47,048
)
 
(62,367
)
Treasury stock, at cost; 115,146 and 110,964 shares of Class A common stock as of June 30, 2017 and December 31, 2016, respectively
(2,597
)
 
(2,500
)
Total equity before noncontrolling interest
952,284

 
987,498

Noncontrolling interest
1,175,430

 
891,246

Total equity
2,127,714

 
1,878,744

Total liabilities and equity
$
4,404,279

 
$
3,752,767

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,
 
2017

2016
 
2017
 
2016
Revenue:



 
 
 
 
Electricity sales
$
105,736


$
91,370

 
$
204,170

 
$
177,033

Other revenue
2,024


2,068

 
4,423

 
4,044

Total revenue
107,760


93,438

 
208,593

 
181,077

Cost of revenue:



 
 
 
 
Project expense
33,405


33,246

 
62,505

 
65,327

Transmission costs
4,722

 
113

 
4,792

 
278

Depreciation and accretion
48,518


43,678

 
92,258

 
87,089

Total cost of revenue
86,645


77,037

 
159,555

 
152,694

Gross profit
21,115


16,401

 
49,038

 
28,383

Operating expenses:



 
 
 
 
General and administrative (Note 16)
11,777


9,265

 
22,901

 
17,827

Related party general and administrative
3,576


1,931

 
7,002

 
3,828

Total operating expenses
15,353


11,196

 
29,903

 
21,655

Operating income
5,762


5,205

 
19,135

 
6,728

Other income (expense):



 
 
 
 
Interest expense
(24,839
)

(21,275
)
 
(47,394
)
 
(42,336
)
Loss on undesignated derivatives, net
(4,751
)

(5,879
)
 
(5,399
)
 
(19,510
)
Earnings in unconsolidated investments, net
14,519


7,240

 
31,395

 
11,070

Net loss on transactions
(807
)

(72
)
 
(1,119
)
 
(39
)
Other income, net
(27
)

564

 
553

 
2,120

Total other expense
(15,905
)

(19,422
)
 
(21,964
)
 
(48,695
)
Net loss before income tax
(10,143
)

(14,217
)
 
(2,829
)
 
(41,967
)
Tax provision
4,541


1,429

 
9,316

 
2,727

Net loss
(14,684
)

(15,646
)
 
(12,145
)
 
(44,694
)
Net loss attributable to noncontrolling interest
(28,904
)

(12,423
)
 
(32,018
)
 
(17,801
)
Net income (loss) attributable to Pattern Energy
$
14,220


$
(3,223
)
 
$
19,873

 
$
(26,893
)
 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding



 
 
 
 
Basic
87,065,591

 
74,443,901

 
87,064,110

 
74,440,950

Diluted
87,217,381

 
74,443,901

 
87,257,130

 
74,440,950

Earnings (loss) per share attributable to Pattern Energy
 
 
 
 
 
 
 
Basic and diluted
$
0.16

 
$
(0.04
)
 
$
0.23

 
$
(0.36
)
Dividends declared per Class A common share
$
0.42

 
$
0.39

 
$
0.83

 
$
0.77


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,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(14,684
)
 
$
(15,646
)
 
$
(12,145
)
 
$
(44,694
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation, net of zero tax impact
7,286

 
780

 
9,749

 
11,642

Derivative activity:
 
 
 
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax (provision) benefit of ($98), $1,379, ($59) and $4,102, respectively
(3,877
)
 
(9,964
)
 
(4,418
)
 
(30,661
)
Reclassifications to net loss, net of tax impact of $236, $281, $487 and $583, respectively
2,164

 
2,721

 
4,483

 
5,623

Total change in effective portion of change in fair market value of derivatives
(1,713
)
 
(7,243
)
 
65

 
(25,038
)
Proportionate share of equity investee’s derivative activity:
 
 
 
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax (provision) benefit of ($1,064), $1,296, ($285) and $3,969, respectively
2,950

 
(3,594
)
 
790

 
(11,008
)
Reclassifications to net loss, net of tax impact of $629, $470, $1,661 and $922, respectively
1,747

 
1,304

 
4,608

 
2,557

Total change in effective portion of change in fair market value of derivatives
4,697

 
(2,290
)
 
5,398

 
(8,451
)
Total other comprehensive income (loss), net of tax
10,270

 
(8,753
)
 
15,212

 
(21,847
)
Comprehensive (loss) income
(4,414
)
 
(24,399
)
 
3,067

 
(66,541
)
Less comprehensive loss attributable to noncontrolling interest:
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interest
(28,904
)
 
(12,423
)
 
(32,018
)
 
(17,801
)
Derivative activity:
 
 
 
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax (provision) benefit of $93, $164, $101 and $507, respectively
(253
)
 
(442
)
 
(274
)
 
(1,370
)
Reclassifications to net loss, net of tax impact of $29, $40, $62 and $87, respectively
79

 
107

 
167

 
235

Total change in effective portion of change in fair market value of derivatives
(174
)
 
(335
)
 
(107
)
 
(1,135
)
Comprehensive loss attributable to noncontrolling interest
(29,078
)
 
(12,758
)
 
(32,125
)
 
(18,936
)
Comprehensive income (loss) attributable to Pattern Energy
$
24,664

 
$
(11,641
)
 
$
35,192

 
$
(47,605
)
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, 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 under equity incentive award plan
287,904

 
3

 

 

 
(3
)
 

 

 

 

 

Repurchase of shares for employee tax withholding

 

 
(2,043
)
 
(40
)
 

 

 

 
(40
)
 

 
(40
)
Stock-based compensation

 

 

 

 
2,777

 

 

 
2,777

 

 
2,777

Dividends declared

 

 

 

 
(57,810
)
 

 

 
(57,810
)
 

 
(57,810
)
Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(8,187
)
 
(8,187
)
Other

 

 

 

 
34

 

 

 
34

 
(469
)
 
(435
)
Net loss

 

 

 

 

 
(26,893
)
 

 
(26,893
)
 
(17,801
)
 
(44,694
)
Other comprehensive loss, net of tax

 

 

 

 

 

 
(20,712
)
 
(20,712
)
 
(1,135
)
 
(21,847
)
Balances at June 30, 2016
74,997,346

 
$
750

 
(67,344
)
 
$
(1,617
)
 
$
927,812

 
$
(104,052
)
 
$
(94,037
)
 
$
728,856

 
$
916,670

 
$
1,645,526

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, net of forfeiture
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
)
Increase in noncontrolling interest from acquisition

 

 

 

 

 

 

 

 
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, 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


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,

2017
 
2016
Operating activities

 

Net loss
$
(12,145
)
 
$
(44,694
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 


Depreciation and accretion
92,258

 
87,089

Amortization of financing costs
3,852

 
3,498

Amortization of debt discount/premium, net
2,227

 
2,074

Amortization of power purchase agreements, net
1,489

 
1,507

Loss on derivatives, net
10,331

 
32,209

Stock-based compensation
2,768

 
2,777

Deferred taxes
9,149

 
2,487

Earnings in unconsolidated investments, net
(31,395
)
 
(11,070
)
Distributions from unconsolidated investments
31,710

 
377

Other reconciling items
(1,017
)
 
(965
)
Changes in operating assets and liabilities:


 


Funds deposited by counterparty
9,199

 
(49,480
)
Trade receivables
(7,995
)
 
(3,753
)
Prepaid expenses
2,202

 
3,400

Other current assets
(3,638
)
 
(2,920
)
Other assets (non-current)
2,561

 
1,839

Accounts payable and other accrued liabilities
31,001

 
(9,631
)
Counterparty deposit liability
(9,199
)
 
49,480

Accrued interest
8,569

 
(178
)
Other current liabilities
4,333

 
(433
)
Long-term liabilities
10,648

 
6,353

Contingent liabilities
275

 
10

Net cash provided by operating activities
157,183

 
69,976

Investing activities

 

Cash paid for acquisitions, net of cash and restricted cash acquired
(170,028
)
 

Capital expenditures
(39,087
)
 
(25,953
)
Distributions from unconsolidated investments
8,390

 
31,774

Other assets
7,552

 
38

Other investing activities
12

 
(163
)
Net cash provided by (used in) investing activities
(193,161
)
 
5,696


9


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

 
Six months ended June 30,

2017
 
2016
Financing activities

 

Dividends paid
(71,544
)
 
(56,097
)
Capital distributions - noncontrolling interest
(9,163
)
 
(8,187
)
Payment for deferred financing costs
(7,740
)
 
(134
)
Proceeds from revolving credit facility
85,000

 
20,000

Repayment of revolving credit facility
(205,000
)
 
(40,000
)
Proceeds from debt
404,395

 

Repayment of debt
(74,824
)
 
(22,262
)
Other financing activities
(3,618
)
 
(1,060
)
Net cash provided by (used in) financing activities
117,506

 
(107,740
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
2,248

 
2,017

Net change in cash, cash equivalents and restricted cash
83,776

 
(30,051
)
Cash, cash equivalents and restricted cash at beginning of period
109,371

 
146,292

Cash, cash equivalents and restricted cash at end of period
$
193,147

 
$
116,241

Supplemental disclosures

 

Cash payments for income taxes
$
288

 
$
155

Cash payments for interest expense
$
33,666

 
$
36,535

Schedule of non-cash activities


 


Change in property, plant and equipment
$
1,110

 
$
1,302

Change in other assets
$
2,492

 
$


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 located in the United States, Canada and Chile. Pattern Energy Group LP (Pattern Development 1.0) owns a 9% interest in the Company. 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 and assets contributed by, or 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 projects and certain assets 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 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 Farm Fowler Ridge), and Broadview Project Finco Pledgor (Broadview Project) (which consists primarily of Broadview Energy KW, LLC and Broadview Energy JN, LLC (together, Broadview) and Western Interconnect transmission line (Western Interconnect)));
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), K2 Wind Ontario Limited Partnership (K2), and SP Armow Wind Ontario LP (Armow) which are accounted for as unconsolidated investments); and
Pattern Chile Holdings LLC (which includes a controlling interest in Parque Eólico El Arrayán SpA (El Arrayán) and controlling interest in Don Goyo Transmisi ó n S.A. (Don Goyo), a transmission asset of El Arrayán).
On July 27, 2017, the Company funded an initial $60 million capital call under the Second Amended and Restated Agreement of Limited Partnership of Pattern Energy Group Holdings 2 LP (PEGH 2), dated as of June 16, 2017, by and among PEGH 2, the Class A Limited Partners set forth therein and the Class B Limited Partners set forth therein. As a result of such funding, and the related funding by other investors in PEGH 2 and consummation of certain redemptions, the Company holds an approximate 20% ownership interest in PEGH 2 representing the Company's 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.
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 June 30, 2017 , the results of operations and comprehensive income (loss) for the three and six months ended June 30, 2017 and 2016 , respectively, and the cash flows for the six months ended June 30, 2017 and 2016 , respectively. The consolidated balance sheet at December 31, 2016 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, 2016 .

11


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.
The Company adopted the provisions of Accounting Standards Update (ASU) 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash as of December 31, 2016 and has revised its consolidated statements of cash flows for the six months ended June 30, 2016 to reflect amounts described as restricted cash and restricted cash equivalents included with cash and cash equivalents in the reconciliation of beginning of period and end of period total amounts shown on the consolidated statements of cash flows.
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, 2017
 
December 31,
2016
 
June 30,
2016
December 31,
2015
Cash and cash equivalents
 
$
162,600

 
$
83,932

 
$
87,641

$
94,808

Restricted cash - current
 
13,137

 
11,793

 
12,228

14,609

Restricted cash
 
17,410

 
13,646

 
16,372

36,875

Cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
 
$
193,147

 
$
109,371

 
$
116,241

$
146,292

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, 2016 .
In January 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-01, Clarifying the Definition of a Business (ASU 2017-01), which provides a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early application is allowed for transactions for which the acquisition date occurs before the issuance date or effective date of this amendment, only if the transaction has not been reported in previously issued financial statements. Early application is also permitted for transactions in which a subsidiary is deconsolidated or a group of assets is derecognized that occur before the issuance date or effective date of the amendments, only if the transaction has not been reported in previously issued financial statements. The amendments should be applied prospectively on or after the effective date and no disclosures are required at transition. The Company will adopt ASU 2017-01 during the third quarter of 2017 and does not expect the adoption to have a material impact on the Company’s consolidated financial statements and related disclosures.
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 Company does not plan to early adopt, and accordingly, will adopt the new standard effective January 1, 2019. 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

12


of the earliest period presented. The Company is in the initial stages of evaluating the impact of the new standard on its accounting policies, processes and system requirements. The Company has assigned internal resources in addition to the engagement of a third party service provider to assist in evaluation. The Company is also assessing the accounting impact of the ASU 2016-02 as it applies to its 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.
In May 2014, the FASB issued a new standard, ASU 2014-09, which creates Accounting Standards Codification (ASC) Topic 606 , Revenue from Contracts with Customers  and supersedes ASC Topic 605,  Revenue Recognition  (ASU 2014-09). The new standard replaces industry-specific guidance and establishes a single five-step model to identify and recognize revenue. The core principle of the new standard 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 new standard 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. 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 , which makes narrow scope amendments to Topic 606 including implementation issues on collectability, non-cash consideration and completed contracts at transition. In December 2016, the FASB issued ASU 2016-20,  Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers , which make additional narrow scope amendments to Topic 606 including loan guarantee fees, impairment testing of contract costs, provisions for losses on construction-type and production-type contracts.
The new standard permits adoption by either using (i) the full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The Company plans to adopt using the modified retrospective approach. The new standard is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company will adopt the new standard effective January 1, 2018.
The Company is in the initial stages of evaluating the impact of the new standard on its accounting policies, processes and system requirements. The Company has assigned internal resources in addition to the engagement of a third party service provider to assist in evaluation. The Company is also assessing the accounting impact of the new standard as it applies certain elements of its revenue arrangements such as contracts that contain the sale of electricity and related renewable energy credits, contracts that contain volume variability, and contracts that contain modification clauses. The Company is assessing whether revenue agreements that contain the sale of both electricity and renewable energy credits, represent separate performance obligations pursuant to the new standard, which would require the transaction price to be allocated to each of the electricity and the renewable energy credit components based on their relative standalone selling prices. In addition, the Company is assessing if the use of the residual approach is appropriate in determining the standalone selling price for renewable energy credits in situations where the standalone selling price of renewable credits is highly variable or uncertain. Under the residual value approach, the standalone selling price of renewable energy credits would be determined by reference to the total transaction price of the revenue agreement less the sum of the observable standalone selling price of the electricity. Further, the Company is in the process of assessing the disclosure impacts of the new standard to the Company’s systems and processes over revenue recognition. As the Company progresses further in its analysis, the scope of this assessment could be expanded to include other contract elements that could have an accounting impact under the new standard.
The Company continues to assess the potential impacts of the new standard and cannot reasonably estimate quantitative information related to the impact of the new standard on its consolidated financial statements at this time.

13


3.      Acquisitions
Business Combination
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. The Company's indirect Class B membership interest in Broadview Holdings represents an 84% interest in initial 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 on the identified ROFO list being developed by Pattern Development 2.0 separately from Broadview, which is expected to begin full construction not earlier than 2018, and which will be interconnected through Western Interconnect. Following the commencement of commercial operations of the Grady Project, at which time the Grady Project will begin making transmission service payments to Western Interconnect, the Company will make the aforementioned contingent post-closing payment.
The identifiable assets, operating contracts and liabilities assumed for Broadview and Western Interconnect 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.
The fair values are as follows (in thousands):
 
 
April 21, 2017
Cash and cash equivalents
 
$
3,022

Trade receivables
 
3,259

Prepaid expenses
 
187

Other current assets
 
9,830

Restricted cash
 
44,383

Deferred financing costs, net
 
1,890

Property, plant and equipment
 
628,500

Intangible assets
 
22,346

Accounts payable and other accrued liabilities
 
(2,956
)
Accrued interest
 
(108
)
Long-term debt, current portion
 
(51,053
)
Accrued construction costs
 
(40,114
)
Related party payable
 
(674
)
Contingent liability
 
(36,205
)
Asset retirement obligation
 
(5,994
)
Other long-term liabilities
 
(12,350
)
Total consideration before non-controlling interest
 
563,963

Less: noncontrolling interests
 
(325,600
)
Total consideration
 
$
238,363

Current assets, non-current restricted cash, accounts payable, other accrued liabilities, accrued interest, accrued construction costs, related party payable and current portion of long-term debt were recorded at carrying value, which was representative of the fair value on the date of acquisition. Property, plant and equipment, finite-lived intangible assets, contingent liabilities and long-term liabilities were recorded at fair value estimated using the cost and income approach. The fair value of asset retirement obligations

14


was recorded at fair value using a combination of market data, operational data and discounted cash flows and was adjusted by a discount rate factor reflecting current market conditions at the time of acquisition.
Concurrent with the closing, certain tax equity investors made capital contributions to acquire 100% of the Class A membership interests in Broadview Holdings and have been admitted as noncontrolling members in the entity, with a 16% initial interest in the distributable cash flow from Broadview. The noncontrolling interest was recorded at fair value estimated using the purchase price from the purchase agreement executed on April 21, 2017 among the Company and the tax equity investors.
The Company recorded a $7.2 million contingent obligation, payable to a third party who holds a 1% interest in Western Interconnect, at fair value upon the acquisition of the Broadview Project. These contingent payments are subject to certain conditions, including the actual energy production of Broadview in a production year and the continued operation of Broadview. Additionally, the Company recorded a $29.0 million contingent obligation, payable to the same counterparty, at fair value upon the acquisition of the Broadview Project. These contingent payments are subject to certain conditions, including the commercial operation of the Grady Project. The contingent payment is calculated as a percentage of additional transmission revenue earned by Western Interconnect upon the Grady Project's commercial operation.
The Broadview Project acquisition includes contingent consideration, which requires the Company to make an additional payment upon the commercial operation of the Grady Project. See Note 12, Fair Value Measurements , for further discussion on the fair value of the contingent consideration.
The Company incurred transaction-related expense of $0.4 million which were recorded in net loss on transactions in the consolidated statements of operations for the three and six months ended June 30, 2017 .
The accounting for this acquisition is preliminary. The fair value estimates for the assets acquired and liabilities assumed were 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).
The Company has determined that the operating partnership agreement does not allocate economic benefits pro rata to its two classes of investors for Broadview and will use the hypothetical liquidation at book value (HLBV) method to calculate the noncontrolling interest balance that reflects the substantive profit sharing arrangement.
The following table presents the amounts included in the consolidated statements of operations for the Broadview Project since their date of acquisition:
Unaudited data (in thousands)
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
Total revenue
 
$
8,801

 
$
8,801

Total expenses
 
(12,997
)
 
(12,997
)
Net loss
 
(4,196
)
 
(4,196
)
Less: net loss attributable to noncontrolling interest
 
(4,255
)
 
(4,255
)
Net income attributable to Pattern Energy
 
$
59

 
$
59

Pro-forma data has not been provided as there is no material difference between pro forma data that give effects to the Broadview Project acquisition as if it had occurred in January 1, 2016 and actual data reported for the three and six months ended June 30, 2017 and 2016. Broadview reached commercial operations in March 2017 and until approximately three weeks before the acquisition, Broadview was still under construction.

15


4.      Property, Plant and Equipment
The following presents the categories within property, plant and equipment (in thousands):
 
June 30,
 
December 31,
 
2017
 
2016
Operating wind farms
$
4,346,605

 
$
3,707,823

Furniture, fixtures and equipment
10,947

 
9,307

Land
141

 
141

Subtotal
4,357,693

 
3,717,271

Less: accumulated depreciation
(675,424
)
 
(582,109
)
Property, plant and equipment, net
$
3,682,269

 
$
3,135,162

The Company recorded depreciation expense related to property, plant and equipment of $47.5 million and $90.5 million for the three and six months ended June 30, 2017 , respectively, and recorded $43.0 million and $85.7 million for the same periods in the prior year.
5.      Finite-Lived Intangible Assets and Liability
Finite-Lived Intangible Assets and Liability
The following presents the major components of the finite-lived intangible assets and liability (in thousands):
 
 
June 30, 2017
 
 
Weighted Average Remaining Life
 
Gross
 
Accumulated Amortization
 
Net
Intangible assets
 
 
 
 
 
 
 
 
Power purchase agreement
 
13
 
$
97,400

 
$
(13,856
)
 
$
83,544

Industrial revenue bond tax savings
 
25
 
12,778

 
(154
)
 
12,624

Other intangible assets
 
34
 
15,234

 
(785
)
 
14,449

Total intangible assets
 
 
 
$
125,412

 
$
(14,795
)
 
$
110,617

Intangible liability
 
 
 
 
 
 
 
 
Power purchase agreement
 
15
 
$
60,300

 
$
(7,371
)
 
$
52,929


 
 
December 31, 2016
 
 
Weighted Average Remaining Life
 
Gross
 
Accumulated Amortization
 
Net
Intangible assets
 
 
 
 
 
 
 
 
Power purchase agreement
 
13
 
$
97,400

 
$
(10,632
)
 
$
86,768

Other intangible assets
 
15
 
5,666

 
(539
)
 
5,127

Total intangible assets
 
 
 
$
103,066

 
$
(11,171
)
 
$
91,895

Intangible liability
 
 
 
 
 
 
 
 
Power purchase agreement
 
16
 
$
60,300

 
$
(5,637
)
 
$
54,663

The Company presents amortization of the PPA asset and PPA liability as an offset to electricity sales in the consolidated statements of operations, which resulted in net expense of $0.7 million and $1.5 million in electricity sales for the three and six months ended June 30, 2017 and net expense of $0.7 million and $1.5 million for the same periods in 2016 . For other intangible assets, the Company includes the amortization in depreciation 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, 2017 and amortization expense of $0.1 million and $0.1 million for the same periods in 2016 .

16


The acquisition of the Broadview Project provided for future property tax savings as a result of the issuance of industrial revenue bonds during construction of the Broadview Project. The Company considered the future tax savings an intangible asset and calculated the fair value of the asset at the acquisition date. The tax savings was calculated by forecasting the difference between the property tax payments that the Broadview Projects would be liable for if the industrial revenue bond structure was not in place and the actual payments in lieu of tax. The fair value of the property tax savings was recorded to finite-lived intangible assets, net on the consolidated balance sheets at the acquisition date, and such value will be amortized to depreciation and accretion in the consolidated statements of operations over the 25 year exemption period that remains as of the acquisition date. The Company recorded amortization expense of $0.2 million and $0.2 million for the three and six months ended June 30, 2017 , respectively, related to industrial revenue bond tax saving intangible asset.
The following table presents estimated future amortization for the next five years related to the PPA asset and PPA liability and other intangible assets (in thousands):
Year ended December 31,
 
Power purchase agreements, net
 
Industrial revenue bond tax savings
 
Other intangible assets
2017 (remainder)
 
$
1,543

 
$
193

 
$
305

2018
 
3,031

 
513

 
605

2019
 
3,031

 
513

 
605

2020
 
3,049

 
513

 
605

2021
 
3,031

 
513

 
605

Thereafter
 
16,930

 
10,379

 
11,724

6.      Variable Interest Entities
The Company has determined that Logan's Gap, Panhandle 1, Panhandle 2, Post Rock, Amazon Wind Farm Fowler Ridge and Broadview Holdings are variable interest entities (VIEs) in accordance with ASU 2015-02 primarily because the tax equity interests in these operating entities 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.

17


The following presents the carrying amounts of the consolidated VIEs' assets and liabilities included in the consolidated balance sheets (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.
 
June 30, 2017
 
December 31, 2016 (1)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
29,062

 
$
12,745

Restricted cash
4,300

 
4,291

Trade receivables
7,964

 
6,290

Prepaid expenses
3,684

 
4,468

Other current assets
4,044

 
1,456

Total current assets
49,054

 
29,250

 
 
 
 
Restricted cash
6,549

 
3,203

Property, plant and equipment, net
2,040,151

 
1,538,793

Finite-lived intangible assets, net
12,519

 
2,070

Other assets
13,550

 
13,622

Total assets
$
2,121,823

 
$
1,586,938

 
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued liabilities
$
15,024

 
12,635

Accrued construction costs
3,628

 
709

Accrued interest
272

 
77

Other current liabilities
3,022

 
2,090

Total current liabilities
21,946

 
15,511

 
 
 
 
Finite-lived intangible liability, net
52,929

 
54,663

Other long-term liabilities
36,457

 
20,081

Total liabilities
$
111,332

 
$
90,255

(1)  
Does not include Broadview Holdings as it was acquired in April 2017.

18


7.      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,
 
2017
 
2016
 
2017
 
2016
South Kent
$
5,487

 
$
1,537

 
50.0
%
 
50.0
%
Grand
4,952

 
3,459

 
45.0
%
 
45.0
%
K2
100,044

 
97,051

 
33.3
%
 
33.3
%
Armow
130,078

 
131,247

 
50.0
%
 
50.0
%
Unconsolidated investments
$
240,561

 
$
233,294

 
 
 
 
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 attributable to property, plant and equipment and PPAs and are being amortized over the particular assets useful life. For the three and six months ended June 30, 2017 , the Company recorded basis difference amortization for its unconsolidated investments of $2.8 million and $5.6 million , respectively, and for the same periods in 2016 , the Company recorded basis difference amortization of $1.3 million and $2.5 million , respectively, in earnings in unconsolidated investments, net on the consolidated statements of operations.
Suspension of Equity Method Accounting
As discussed in Note 2 , Summary of Significant Accounting Policies in the Company's 2016 Form 10-K, the Company may suspend recognition of equity method earnings when the Company receives distributions in excess of the carrying value of its investment, and the Company is not liable for the obligations of the investee nor otherwise committed to provide financial support. The Company records gains resulting from such excess distributions in the period the distributions occur. Additionally, when the Company's carrying value in an unconsolidated investment is zero and the Company is not liable for the obligations of the investee nor otherwise committed to provide financial support, the Company does not recognize equity in earnings (losses) or equity in other comprehensive income of unconsolidated investments.
As of June 30, 2017 , none of the Company's unconsolidated investments were in suspension. As of June 30, 2016, the Company's equity method balances for South Kent and Grand were zero. In accordance with ASC 323, Investments - Equity Method and Joint Ventures , the Company suspended recognition of South Kent's and Grand's equity method earnings or losses until the fourth quarter of 2016 when their cumulative equity method earnings exceeded cumulative distributions received and cumulative equity method losses. As the Company has no explicit or implicit commitment to fund losses at the unconsolidated investments, the Company recorded distributions received in excess of the carrying amount of its unconsolidated investments as gains. Earnings in unconsolidated investments, net as reported on the consolidated statements of operations attributable to South Kent and Grand included $7.5 million and $9.2 million for the three and six months ended June 30, 2016, respectively, in distributions received in excess of the carrying amount of the Company's investment.
During the suspension period, the Company maintains a memo ledger that records the components of the suspended activity. As of June 30, 2016, the memo ledger balance was made up of distributions received in excess of the carrying amount of the Company's investment of $9.2 million , suspended equity losses of $1.9 million and suspended other comprehensive income of $0.1 million .

19


Aggregate Financial Data for Unconsolidated Investees
The following summarizes the statements of operations, in aggregate, for the unconsolidated investees (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016 (1)
 
2017
 
2016 (1)
Revenue
$
82,744

 
$
54,147

 
$
183,103

 
$
126,563

Cost of revenue
28,149

 
23,618

 
57,738

 
46,045

Operating expenses
919

 
578

 
1,633

 
1,022

Other expense
15,135

 
30,177

 
37,976

 
68,267

Net income (loss)
$
38,541

 
$
(226
)
 
$
85,756

 
$
11,229

(1)  
Results for the three and six months ended June 30, 2016 do not include Armow, which was acquired in October 2016.
Significant Equity Method Investees
The following table presents summarized statements of operations information for the three and six months ended June 30, 2017 and 2016 (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 June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
26,727

 
$
21,376

 
$
58,881

 
$
49,905

Cost of revenue
7,480

 
8,389

 
15,931

 
16,385

Operating expenses
278

 
239

 
467

 
427

Other expense
(170
)
 
13,268

 
5,973

 
32,957

Net income (loss)
$
19,139

 
$
(520
)
 
$
36,510

 
$
136


20


8.      Debt
The Company’s debt consists of the following for periods presented below (in thousands):
 
 
 
 
 
As of June 30, 2017
 
June 30, 2017
 
December 31, 2016
 
Contractual Interest Rate
 
Effective Interest Rate
 
 
 
 
 
 
 
Maturity
Corporate-level
 
 
 
 
 
 
 
 
 
Revolving Credit Facility
$
60,000

 
$
180,000

 
varies

(1)  
3.46
%
(1)  
December 2018
2020 Notes
225,000

 
225,000

 
4.00
%
 
6.60
%
 
July 2020
2024 Notes
350,000

 

 
5.88
%
 
5.88
%
 
February 2024
Project-level
 
 
 
 
 
 
 
 
 
Fixed interest rate
 
 
 
 
 
 
 
 
 
El Arrayán EKF term loan
101,984

 
103,904

 
5.56
%
 
5.56
%
 
March 2029
Santa Isabel term loan
105,953

 
107,090

 
4.57
%
 
4.57
%
 
September 2033
Variable interest rate
 
 
 
 
 
 
 
 
 
Ocotillo commercial term loan (2)
188,906

 
193,257

 
2.90
%
 
3.82
%
(3)  
August 2020
Lost Creek term loan
100,145

 
103,846

 
3.07
%
 
6.51
%
(3)  
September 2027
El Arrayán commercial term loan
92,713

 
94,458

 
4.17
%
 
5.70
%
(3)  
March 2029
Spring Valley term loan
127,445

 
130,658

 
3.05
%
 
5.19
%
(3)  
June 2030
Ocotillo development term loan
101,200

 
102,300

 
3.25
%
 
4.42
%
(3)  
August 2033
St. Joseph term loan (2)
168,016

 
162,356

 
2.70
%
 
3.86
%
(3)  
November 2033
Western Interconnect term loan (2)
54,395

 

 
3.05
%
 
3.97
%
(3)  
April 2027
Imputed interest rate
 
 
 
 
 
 
 
 
 
Hatchet Ridge financing lease obligation
196,363

 
202,593

 
1.43
%
 
1.43
%
 
December 2032
 
1,872,120

 
1,605,462

 
 
 
 
 
 
Unamortized premium/discount, net  (4)
(14,791
)
 
(17,019
)
 
 
 
 
 
 
Unamortized financing costs
(30,684
)
 
(24,771
)
 
 
 
 
 
 
Total debt, net
$
1,826,645

 
1,563,672

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As reflected on the consolidated balance sheets
 
 
 
 
 
 
 
 
 
Revolving credit facility
$
60,000

 
$
180,000

 
 
 
 
 
 
Current portion of long-term debt, net of financing costs
54,975

 
48,716

 
 
 
 
 
 
Long term debt, net of financing costs
1,711,670

 
1,334,956

 
 
 
 
 
 
Total debt, net
$
1,826,645

 
$
1,563,672

 
 
 
 
 
 
(1)  
Refer to Revolving Credit Facility for interest rate details.
(2)  
The amortization for the Ocotillo commercial term loan, the St. Joseph term loan, and the Western Interconnect term loan are through June 2030, September 2036 and March 2036, respectively, which differs from the stated maturity date of such loans due to prepayment requirements.
(3)  
Includes impact of interest rate derivatives. See Note 10 , Derivative Instruments , for discussion of interest rate derivatives.
(4)  
Premium amount is related to the Lost Creek term loan and discount amount is related to the 2020 Notes.

21


Interest and commitment fees incurred and interest expense for debt consisted of the following (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Corporate-level interest and commitment fees incurred
$
8,497

 
$
4,952

 
$
15,612

 
$
10,005

Project-level interest and commitment fees incurred (1)
13,107

 
13,356

 
25,468

 
26,444

Amortization of debt discount/premium, net
1,125

 
1,042

 
2,227

 
2,074

Amortization of financing costs
1,994

 
1,752

 
3,852

 
3,498

Other interest
116

 
173

 
235

 
315

Interest expense
$
24,839

 
$
21,275

 
$
47,394

 
$
42,336

(1)  
Includes reclassification of realized gains (losses) on derivative instruments that qualifies as cash flow hedges from accumulated OCI into interest expense and the ineffective portion of the instruments.
Corporate Level Debt
Revolving Credit Facility
As of June 30, 2017 , $403.7 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 June 30, 2017 , the Company's holding company subsidiaries were in compliance with covenants contained in the Revolving Credit Facility.
The loans under the Company's Revolving Credit Facility are either base rate loans or Eurodollar rate loans. The base rate loans accrue interest at the fluctuating rate per annum equal to the greatest of the (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate that would be in effect for a Eurodollar rate loan with an interest period of one month plus 1.0% , plus an applicable margin ranging from 1.25% to 1.75% (corresponding to applicable leverage ratios of the borrower). The Eurodollar rate loans accrue interest at a rate per annum equal to International Continental Exchange London Interbank Offered Rate (LIBOR), as published by Reuters plus an applicable margin ranging from 2.25% to 2.75% (corresponding to applicable leverage ratios of the borrower). Under the Revolving Credit Facility, the Company pays a revolving commitment fee equal to the average of the daily difference between revolving commitments and the total utilization of revolving commitments times 0.50% . The Company also pays letter of credit fees.
As of June 30, 2017 and December 31, 2016 , letters of credit of $36.3 million and $31.7 million were issued under the Revolving Credit Facility.
Unsecured Senior Notes due 2024
In January 2017, the Company issued unsecured senior notes with an aggregate principal amount of $350.0 million (Unsecured Senior Notes or 2024 Notes). Net proceeds to the Company were approximately $345.0 million , after deducting the initial purchasers’ discount, commissions and transaction expenses. The 2024 Notes bear interest at a rate of 5.875%  per year, payable semiannually in arrears on February 1 and August 1, beginning on August 1, 2017 and maturing on February 1, 2024, unless repurchased or redeemed at an earlier date. The 2024 Notes are guaranteed on a senior unsecured basis by Pattern US Finance Company, one of the Company's subsidiaries.
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.
The 2020 Notes are guaranteed on a senior unsecured basis by a subsidiary of the Company and are general unsecured obligations of the Company. The obligations rank senior in rights of payment to the Company’s subordinated debt, equal in right of payment

22


to the Company’s unsubordinated debt and effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness.
The following table presents a summary of the equity and liability components of the 2020 Notes (in thousands):
 
June 30, 2017
 
December 31,
2016
Principal
$
225,000

 
$
225,000

Less:

 

Unamortized debt discount
(15,874
)
 
(18,196
)
Unamortized financing costs
(3,348
)
 
(3,894
)
Carrying value of convertible senior notes
$
205,778

 
$
202,910

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

 
$
23,743

(1)  
Included in the consolidated balance sheets as additional paid-in capital, net of $0.7 million in equity issuance costs.
Project level debt
Western Interconnect
In April 2017, in connection with the Broadview Project acquisition, the Company assumed a $51.2 million senior construction loan facility, including accrued interest, which was immediately extinguished and concurrently, the Company entered into a variable rate term loan maturing on April 21, 2027 for $54.4 million . The interest rate on the term loan is LIBOR plus 2.00% (with periodic increases of 0.25% every four years).
Collateral for the term loan includes Western Interconnect's tangible assets and contractual rights and cash on deposit with the depository agent. Such loan agreement contains a broad range of covenants that, subject to certain exceptions, restrict Western Interconnect's ability to incur debt, grant liens, sell or lease certain assets, transfer equity interests, dissolve, make distributions, or change its business.
9.      Asset Retirement Obligation
The Company's asset retirement obligations represent the estimated cost of decommissioning the turbines, removing above-ground installations and restoring the sites at the end of its estimated economic useful life.
The following table presents a reconciliation of the beginning and ending aggregate carrying amounts of asset retirement obligation (in thousands):
 
 
Six months ended June 30,
 
 
2017
 
2016
Beginning asset retirement obligations
 
$
44,783

 
$
42,197

Net additions during the period (1)
 
5,994

 

Foreign currency translation adjustment
 
91

 
159

Accretion expense
 
1,357

 
1,260

Ending asset retirement obligations
 
$
52,225

 
$
43,616

(1)         Reflects additions due to acquisition of the Broadview Project. See Note 3 , Acquisitions , for discussion of the acquisition.

23


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 interest rates. 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 June 30, 2017 , 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.
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):
 
 
June 30, 2017
 
 
Derivative Assets
 
Derivative Liabilities (1)
 
 
Current
 
Long-Term
 
Current
 
Long-Term
Fair Value of Designated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$

 
$
7,540

 
$
20,140