Pattern Energy Group Inc.
Pattern Energy Group Inc. (Form: 10-Q, Received: 11/09/2017 16:38:33)
 
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, 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 November 6, 2017 there were 97,906,077 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, 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)
 
September 30,
 
December 31,

2017
 
2016
Assets

 

Current assets:

 

Cash and cash equivalents (Note 6)
$
91,057

 
$
83,932

Restricted cash (Note 6)
7,150

 
11,793

Funds deposited by counterparty
33,530

 
43,635

Trade receivables (Note 6)
48,960

 
37,510

Derivative assets, current
18,824

 
17,578

Prepaid expenses (Note 6)
18,405

 
13,803

Deferred financing costs, current, net of accumulated amortization of $11,360 and $9,350 as of September 30, 2017 and December 31, 2016, respectively
2,514

 
2,456

Other current assets (Note 6)
19,058

 
7,350

Total current assets
239,498

 
218,057

Restricted cash (Note 6)
19,866

 
13,646

Property, plant and equipment, net (Note 6)
4,023,355

 
3,135,162

Unconsolidated investments
303,833

 
233,294

Derivative assets
14,865

 
26,712

Deferred financing costs
4,339

 
4,052

Net deferred tax assets
6,107

 
5,559

Finite-lived intangible assets, net (Note 6)
138,516

 
91,895

Other assets (Note 6)
22,649

 
24,390

Total assets
$
4,773,028

 
$
3,752,767

Liabilities and equity

 

Current liabilities:

 

Accounts payable and other accrued liabilities (Note 6)
$
53,200

 
$
31,305

Accrued construction costs (Note 6)
2,765

 
1,098

Counterparty deposit liability
33,530

 
43,635

Accrued interest (Note 6)
7,043

 
9,545

Dividends payable
37,645

 
35,960

Derivative liabilities, current
12,095

 
11,918

Revolving credit facility
253,000

 
180,000

Current portion of long-term debt, net
58,213

 
48,716

Other current liabilities (Note 6)
13,133

 
4,698

Total current liabilities
470,624

 
366,875

Long-term debt, net
1,871,607

 
1,334,956

Derivative liabilities
21,979

 
24,521

Net deferred tax liabilities
50,573

 
31,759

Finite-lived intangible liability, net
52,062

 
54,663

Contingent liabilities
58,820

 
576

Other long-term liabilities (Note 6)
98,519

 
60,673

Total liabilities
2,624,184

 
1,874,023

Commitments and contingencies (Note 15)


 


Equity:

 

Class A common stock, $0.01 par value per share: 500,000,000 shares authorized; 88,569,377 and 87,410,687 shares outstanding as of September 30, 2017 and December 31, 2016, respectively
886

 
875

Additional paid-in capital
1,062,252

 
1,145,760

Accumulated loss
(104,225
)
 
(94,270
)
Accumulated other comprehensive loss
(24,821
)
 
(62,367
)
Treasury stock, at cost; 115,146 and 110,964 shares of Class A common stock as of September 30, 2017 and December 31, 2016, respectively
(2,597
)
 
(2,500
)
Total equity before noncontrolling interest
931,495

 
987,498

Noncontrolling interest
1,217,349

 
891,246

Total equity
2,148,844

 
1,878,744

Total liabilities and equity
$
4,773,028

 
$
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 September 30,
 
Nine months ended September 30,
 
2017

2016
 
2017
 
2016
Revenue:



 
 
 
 
Electricity sales
$
89,807


$
89,919

 
$
293,977

 
$
266,952

Other revenue
2,223


1,995

 
6,646

 
6,039

Total revenue
92,030


91,914

 
300,623

 
272,991

Cost of revenue:



 
 
 
 
Project expense
33,932


31,271

 
96,437

 
96,711

Transmission costs
7,421

 
113

 
12,213

 
278

Depreciation and accretion
52,379


43,693

 
144,637

 
130,782

Total cost of revenue
93,732


75,077

 
253,287

 
227,771

Gross profit (loss)
(1,702
)

16,837

 
47,336

 
45,220

Operating expenses:



 
 
 
 
General and administrative (Note 16)
9,068


9,598

 
31,969

 
27,425

Related party general and administrative
3,587


3,553

 
10,589

 
7,381

Total operating expenses
12,655


13,151

 
42,558

 
34,806

Operating income (loss)
(14,357
)

3,686

 
4,778

 
10,414

Other income (expense):



 
 
 
 
Interest expense
(27,147
)

(19,798
)
 
(74,541
)
 
(62,134
)
Gain (loss) on undesignated derivatives, net
(4,081
)

1,825

 
(9,480
)
 
(17,685
)
Realized loss on designated derivatives
(2,207
)


 
(2,207
)
 

Earnings (loss) in unconsolidated investments, net
(3,964
)

4,685

 
27,431

 
15,755

Net loss on transactions
(466
)

(314
)
 
(1,585
)
 
(353
)
Other income, net
7


177

 
560

 
2,297

Total other expense
(37,858
)

(13,425
)
 
(59,822
)
 
(62,120
)
Net loss before income tax
(52,215
)

(9,739
)
 
(55,044
)
 
(51,706
)
Tax (benefit) provision
(3,839
)

1,311

 
5,477

 
4,038

Net loss
(48,376
)

(11,050
)
 
(60,521
)
 
(55,744
)
Net loss attributable to noncontrolling interest
(18,548
)

(7,037
)
 
(50,566
)
 
(24,838
)
Net loss attributable to Pattern Energy
$
(29,828
)

$
(4,013
)
 
$
(9,955
)
 
$
(30,906
)
 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding



 
 
 
 
Basic and diluted
87,370,979

 
81,531,775

 
87,146,465

 
76,821,811

Loss per share attributable to Pattern Energy
 
 
 
 
 
 
 
Basic and diluted
$
(0.34
)
 
$
(0.05
)
 
$
(0.12
)
 
$
(0.40
)
Dividends declared per Class A common share
$
0.42

 
$
0.40

 
$
1.25

 
$
1.17


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 September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(48,376
)
 
$
(11,050
)
 
$
(60,521
)
 
$
(55,744
)
Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation, net of tax provision of $3,656, zero, $3,656 and zero, respectively
8,230

 
(1,768
)
 
17,979

 
9,874

Derivative activity:
 
 
 
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax (provision) benefit of ($1,285), $198, ($1,344) and $4,300, respectively
1,920

 
(329
)
 
(2,498
)
 
(30,990
)
Reclassifications to net loss due to termination of interest rate swaps, net of zero tax impact
2,207

 

 
2,207

 

Other reclassifications to net loss, net of tax impact of $351, $284, $838 and $867, respectively
2,540

 
2,736

 
7,023

 
8,359

Total change in effective portion of change in fair market value of derivatives
6,667

 
2,407

 
6,732

 
(22,631
)
Proportionate share of equity investee’s derivative activity:
 
 
 
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax (provision) benefit of ($2,075), $244, ($2,360) and $4,213, respectively
5,756

 
(676
)
 
6,546

 
(11,684
)
Reclassifications to net loss, net of tax impact of $672, $70, $2,333 and $992, respectively
1,863

 
195

 
6,471

 
2,752

Total change in effective portion of change in fair market value of derivatives
7,619

 
(481
)
 
13,017

 
(8,932
)
Total other comprehensive income (loss), net of tax
22,516

 
158

 
37,728

 
(21,689
)
Comprehensive loss
(25,860
)
 
(10,892
)
 
(22,793
)
 
(77,433
)
Less comprehensive loss attributable to noncontrolling interest:
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interest
(18,548
)
 
(7,037
)
 
(50,566
)
 
(24,838
)
Foreign currency translation, net of zero tax impact
(718
)
 

 
(718
)
 

Derivative activity:
 
 
 
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax (provision) benefit of ($267), ($35), ($166) and $472, respectively
763

 
164

 
489

 
(1,206
)
Reclassifications to net loss, net of tax impact of $86, $39, $148 and $126, respectively
244

 
106

 
411

 
341

Total change in effective portion of change in fair market value of derivatives
1,007

 
270

 
900

 
(865
)
Comprehensive loss attributable to noncontrolling interest
(18,259
)
 
(6,767
)
 
(50,384
)
 
(25,703
)
Comprehensive (loss) income attributable to Pattern Energy
$
(7,601
)
 
$
(4,125
)
 
$
27,591

 
$
(51,730
)
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, 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, net of issuance costs
931,561

 
9

 

 

 
22,500

 

 

 
22,509

 

 
22,509

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

 
2

 

 

 
(2
)
 

 

 

 

 

Repurchase of shares for employee tax withholding

 

 
(4,182
)
 
(97
)
 

 

 

 
(97
)
 

 
(97
)
Stock-based compensation

 

 

 

 
4,085

 

 

 
4,085

 

 
4,085

Dividends declared

 

 

 

 
(110,168
)
 

 

 
(110,168
)
 

 
(110,168
)
Acquisition of Broadview Project and Meikle

 

 

 

 

 

 

 

 
390,389


390,389

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(13,701
)
 
(13,701
)
Other

 

 

 

 
77

 

 

 
77

 
(201
)
 
(124
)
Net loss

 

 

 

 

 
(9,955
)
 

 
(9,955
)
 
(50,566
)
 
(60,521
)
Other comprehensive income, net of tax

 

 

 

 

 

 
37,546

 
37,546

 
182

 
37,728

Balances at September 30, 2017
88,684,523

 
$
886

 
(115,146
)
 
$
(2,597
)
 
$
1,062,252

 
$
(104,225
)
 
$
(24,821
)
 
$
931,495

 
$
1,217,349

 
$
2,148,844


See accompanying notes to consolidated financial statements.

8


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

 
Nine months ended September 30,

2017
 
2016
Operating activities

 

Net loss
$
(60,521
)
 
$
(55,744
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 


Depreciation and accretion
144,637

 
130,782

Amortization of financing costs
5,879

 
5,242

Amortization of debt discount/premium, net
3,379

 
3,147

Amortization of power purchase agreements, net
2,435

 
2,278

Loss on derivatives, net
15,662

 
29,757

Realized loss on derivatives, net
2,207

 

Stock-based compensation
4,085

 
4,362

Deferred taxes
9,133

 
3,681

Intraperiod tax allocation
(3,656
)
 

Earnings in unconsolidated investments, net
(27,431
)
 
(15,755
)
Distributions from unconsolidated investments
43,093

 
377

Other reconciling items
(2,047
)
 
44

Changes in operating assets and liabilities:


 


Funds deposited by counterparty
10,105

 
(46,643
)
Trade receivables
(2,861
)
 
6,078

Prepaid expenses
(3,187
)
 
(1,005
)
Other current assets
(9,790
)
 
(3,709
)
Other assets (non-current)
2,457

 
865

Accounts payable and other accrued liabilities
16,389

 
(2,658
)
Counterparty deposit liability
(10,105
)
 
46,643

Accrued interest
(3,884
)
 
(6,017
)
Other current liabilities
8,040

 
811

Long-term liabilities
14,569

 
4,952

Contingent liabilities
742

 
(117
)
Net cash provided by operating activities
159,330

 
107,371

Investing activities

 

Cash paid for acquisitions, net of cash and restricted cash acquired
(289,329
)
 
(4,024
)
Capital expenditures
(44,295
)
 
(31,554
)
Distributions from unconsolidated investments
11,211

 
40,066

Other assets
7,607

 
1,619

Other investing activities

 
(136
)
Net cash provided by (used in) investing activities
(314,806
)
 
5,971


9


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

 
Nine months ended September 30,

2017
 
2016
Financing activities

 

Proceeds from public offering, net of issuance costs
$
22,431

 
$
286,583

Dividends paid
(107,943
)
 
(85,159
)
Capital distributions - noncontrolling interest
(13,701
)
 
(11,771
)
Payment for deferred financing costs
(7,763
)
 
(134
)
Proceeds from revolving credit facility
323,000

 
20,000

Repayment of revolving credit facility
(250,000
)
 
(340,000
)
Proceeds from debt
404,395

 

Repayment of debt
(192,109
)
 
(39,322
)
Payment for interest rate swaps
(14,372
)
 

Other financing activities
(3,712
)
 
(634
)
Net cash provided by (used in) financing activities
160,226

 
(170,437
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
3,952

 
1,750

Net change in cash, cash equivalents and restricted cash
8,702

 
(55,345
)
Cash, cash equivalents and restricted cash at beginning of period
109,371

 
146,292

Cash, cash equivalents and restricted cash at end of period
$
118,073

 
$
90,947

Supplemental disclosures

 

Cash payments for income taxes
$
335

 
$
233

Cash payments for interest expense
$
70,100

 
$
59,172

Schedule of non-cash activities


 


Change in property, plant and equipment
$
619

 
$
6,132


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), a consolidated controlling interest in Meikle Wind Energy Limited Partnership (Meikle) and noncontrolling interests in South Kent Wind LP (South Kent), Grand Renewable Wind LP (Grand), K2 Wind Ontario Limited Partnership (K2), and SP Armow Wind Ontario LP (Armow) which are accounted for as unconsolidated investments); and
Pattern Chile Holdings LLC (which includes a controlling interest in Parque Eólico El Arrayán SpA (El Arrayán) and a 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 September 30, 2017 , the results of operations and comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016 , respectively, and the cash flows for the nine months ended September 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 nine months ended September 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
Restricted cash consists of cash balances which are restricted as to withdrawal or usage and includes cash to collateralize bank letters of credit related primarily to interconnection rights, power sale agreements (PSA) and for certain reserves required under the Company's loan agreements. 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):
 
 
September 30, 2017
 
December 31,
2016
 
September 30,
2016
December 31,
2015
Cash and cash equivalents
 
$
91,057

 
$
83,932

 
$
65,733

$
94,808

Restricted cash - current
 
7,150

 
11,793

 
11,562

14,609

Restricted cash
 
19,866

 
13,646

 
13,652

36,875

Cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
 
$
118,073

 
$
109,371

 
$
90,947

$
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 September 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comment s (ASU 2017-13), which amends the early adoption date option for certain companies related to the adoption of ASU 2014-09 and ASU 2016-02. The SEC staff stated the SEC would not object to a public business entity that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC adopting Topic 606 and Topic 842 using the adoption dates available for non-public entities. The Company does not expect the adoption of this update to have a material impact on its consolidated financial statements and related disclosures; however, certain of the Company's unconsolidated investments, for which the Company may be required to include in its Form 10-K, may elect to utilize the adoption date available for non-public entities.

12


In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12), which amends the presentation and disclosure requirements and changes how companies assess effectiveness. The amendments are intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 is effective for annual periods beginning after December 15, 2018, including interim periods within those periods. Early application is permitted. The Company is currently assessing the future impact of this update on its consolidated financial statements and related disclosures.
In January 2017, the 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, with early application permitted. The Company adopted ASU 2017-01 on July 1, 2017. The adoption of ASU 2017-01 resulted in the acquisition of Meikle being accounted for as an asset acquisition.
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 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 has reached preliminary conclusions on key accounting assessments related to the standard. Based on the Company’s assessment and review of the revenue transactions with its customers, the Company does not expect the adoption to have a material impact on its consolidated financial statements. The Company expects that the revenue recognition related to sales of electricity

13


and renewable energy credits to remain substantially unchanged. The Company will continue to monitor and assess the impact of any changes to the standard and interpretations as they become available.
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, which achieved commercial operations in the first quarter of 2017. The acquisition is in alignment with the Company's growth strategy to expand its portfolio of generating 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.

14


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
 
627,648

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
 
(38,960
)
Related party payable
 
(674
)
Contingent liability
 
(36,205
)
Asset retirement obligation
 
(6,296
)
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 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 nine months ended September 30, 2017 .

15


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). During the three months ended September 30, 2017, the Company adjusted the initial valuation and decreased property, plant and equipment by  $0.9 million , decreased accrued construction costs by  $1.2 million and increased asset retirement obligations by  $0.3 million . These changes are as a result of the updated inputs, assumptions and methodologies used in determining the fair value of these assets and liabilities.
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.
Asset Acquisition
Meikle
On August 10, 2017, pursuant to a Purchase and Sale Agreement by and among the Company, Pattern Development 1.0, and Public Sector Pension Investment Board (PSP), the Company acquired  50.99%  of the limited partner interests in Meikle and 70% of the issued and outstanding shares of Meikle Wind Energy Corp. (Meikle Corp) for a purchase price of  $67.4 million, paid at closing, in addition to $1.1 million of capitalized transaction-related expenses. PSP acquired 48.99% of the limited partner interest in Meikle and 30% of the issued and outstanding shares of Meikle Corp for a purchase price of $64.8 million . Meikle operates the approximately 179 MW wind farm located in the Peace River Regional District of British Columbia, Canada, which achieved commercial operations in the first quarter of 2017.
The fair value of the purchase consideration, including transaction-related expenses of the asset acquisition, and fair value of the noncontrolling interest is allocated to the relative fair value of the individual assets, operating contracts and liabilities assumed. The noncontrolling interest was recorded at fair value estimated using the purchase price paid by PSP pursuant to the Purchase and Sale Agreement. The preliminary fair value of the assets acquired and liabilities assumed in connection with the Meikle acquisition are as follows (in thousands):

August 10, 2017
Cash and cash equivalents
$
3,865

Trade receivables
5,432

Prepaid expenses
1,194

Deferred financing costs, current
36

Other current assets
432

Restricted cash
6,808

Deferred financing costs
726

Property, plant and equipment
375,717

Finite lived intangible asset
29,287

Other assets
80

Accounts payable and other accrued liabilities
(4,676
)
Accrued construction costs
(1,762
)
Related party payable
(96
)
Accrued interest
(1,180
)
Derivative liabilities, current
(1,980
)
Current portion of long-term debt
(7,291
)
Long-term debt, net
(258,303
)
Derivative liabilities, noncurrent
(13,198
)
Other long-term liabilities
(1,816
)
Total consideration before non-controlling interest
133,275

Less: noncontrolling interests
(64,789
)
Total consideration
$
68,486


16


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).
Supplemental Pro Forma Data (unaudited)
Broadview reached commercial operations in March 2017 and until approximately three weeks before acquisition, Broadview was still under construction. Therefore, pro forma data for Broadview has not been provided as there is no material difference between pro forma data that give effects to the Broadview Project acquisition as if it had occurred on January 1, 2016 and actual data reported for the three and nine months ended September 30, 2017 and 2016.
Meikle was under construction throughout 2016 and did not reach commercial operations until February 1, 2017. Meikle's statements of operations and balance sheets for the year ended December 31, 2016 reflect development and construction activity, whose costs were primarily being capitalized to construction in progress, and include no revenue or operating expenses. Therefore, the Company has determined there is no material difference between pro forma data that give effects to the Meikle acquisition as if it had occurred on January 1, 2016 and the commercial operations date. The unaudited pro forma data is presented for illustrative purposes only and is not intended to be indicative of actual results that would have been achieved had the acquisition been consummated as of February 1, 2017 when Meikle reached commercial operations. The unaudited pro forma data should not be considered representative of the Company’s future financial condition or results of operations.
Unaudited pro forma data (in thousands)
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
Pro forma total revenue
 
$
94,820

 
$
312,116

Pro forma total expenses
 
(144,170
)
 
(376,980
)
Pro forma net loss
 
(49,350
)
 
(64,864
)
Less: pro forma net loss attributable to noncontrolling interest
 
(19,025
)
 
(52,694
)
Pro forma net loss attributable to Pattern Energy
 
$
(30,325
)
 
$
(12,170
)
The following table presents the amounts included in the consolidated statements of operations for the acquisitions discussed above since their respective dates of acquisition:
Unaudited data (in thousands)
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
Total revenue
 
$
16,556

 
$
25,357

Total expenses
 
(22,859
)
 
(35,856
)
Net loss
 
(6,303
)
 
(10,499
)
Less: net loss attributable to noncontrolling interest
 
(7,019
)
 
(11,274
)
Net income attributable to Pattern Energy
 
$
716

 
$
775

Unconsolidated Investment
PEGH 2
On July 27, 2017, the Company funded an initial $60 million capital call under the Second Amended and Restated Agreement of Limited Partnership of 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. The Company is a noncontrolling investor in PEGH 2, but has significant influence over PEGH 2. Accordingly, the investment is accounted for under the equity method of accounting.
The Company capitalized $1.5 million of transaction costs for the nine months ended September 30, 2017. The cost of the Company's investment in PEGH 2 was $40.6 million higher than the Company's underlying equity in the net assets of PEGH 2. This equity method basis difference was primarily attributable to equity method goodwill.

17


4.      Property, Plant and Equipment
The following presents the categories within property, plant and equipment (in thousands):
 
September 30,
 
December 31,
 
2017
 
2016
Operating wind farms
$
4,740,532

 
$
3,707,823

Furniture, fixtures and equipment
12,631

 
9,307

Land
141

 
141

Subtotal
4,753,304

 
3,717,271

Less: accumulated depreciation
(729,949
)
 
(582,109
)
Property, plant and equipment, net
$
4,023,355

 
$
3,135,162

The Company recorded depreciation expense related to property, plant and equipment of $51.4 million and $141.9 million for the three and nine months ended September 30, 2017 , respectively, and recorded $43.0 million and $128.7 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):
 
 
September 30, 2017
 
 
Weighted Average Remaining Life
 
Gross
 
Accumulated Amortization
 
Net
Intangible assets
 
 
 
 
 
 
 
 
Power purchase agreement
 
16
 
$
127,330

 
$
(15,668
)
 
$
111,662

Industrial revenue bond tax savings
 
25
 
12,778

 
(223
)
 
12,555

Other intangible assets
 
34
 
15,234

 
(935
)
 
14,299

Total intangible assets
 
 
 
$
155,342

 
$
(16,826
)
 
$
138,516

Intangible liability
 
 
 
 
 
 
 
 
Power purchase agreement
 
15
 
$
60,300

 
$
(8,238
)
 
$
52,062


 
 
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 assets and PPA liability as an offset to electricity sales in the consolidated statements of operations, which resulted in net expense of $0.9 million and $2.4 million in electricity sales for the three and nine months ended September 30, 2017 and net expense of $0.7 million and $2.3 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 $0.4 million for the three and nine months ended September 30, 2017 and amortization expense of $0.1 million and $0.2 million for the same periods in 2016 .

18


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 Project 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 $0.1 million and $0.2 million for the three and nine months ended September 30, 2017 , respectively, related to the industrial revenue bond tax savings intangible asset.
The following table presents estimated future amortization for the next five years related to the Company's finite lived intangible assets and liabilities (in thousands):
Year ended December 31,
 
Power purchase agreements, net
 
Industrial revenue bond tax savings
 
Other intangible assets
2017 (remainder)
 
$
1,079

 
$
128

 
$
152

2018
 
4,253

 
513

 
605

2019
 
4,253

 
513

 
605

2020
 
4,274

 
513

 
605

2021
 
4,253

 
513

 
605

Thereafter
 
41,488

 
10,375

 
11,727

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.
The Company’s equity method investment in PEGH 2 is considered to be a VIE in accordance with ASU 2015-02 primarily because the total equity at risk is not sufficient to permit PEGH 2 to finance its activities without additional subordinated financial support by the equity holders. The Company does not hold the power or benefits to be the primary beneficiary and does not consolidate the VIE. The carrying value of its unconsolidated investment in PEGH 2 was $59.3 million at September 30, 2017. The Company's maximum exposure to loss is equal to the carrying value of its investment in PEGH 2. See Note 3, Acquisitions , for additional information.

19


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.
 
September 30, 2017
 
December 31, 2016 (1)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
26,442

 
$
12,745

Restricted cash
4,305

 
4,291

Trade receivables
8,694

 
6,290

Prepaid expenses
4,964

 
4,468

Other current assets
4,274

 
1,456

Total current assets
48,679

 
29,250

 
 
 
 
Restricted cash
3,517

 
3,203

Property, plant and equipment, net
2,008,700

 
1,538,793

Finite-lived intangible assets, net
12,364

 
2,070

Other assets
13,499

 
13,622

Total assets
$
2,086,759

 
$
1,586,938

 
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued liabilities
$
24,754

 
12,635

Accrued construction costs
1,560

 
709

Accrued interest
80

 
77

Other current liabilities
4,084

 
2,090

Total current liabilities
30,478

 
15,511

 
 
 
 
Finite-lived intangible liability, net
52,062

 
54,663

Other long-term liabilities
40,505

 
20,081

Total liabilities
$
123,045

 
$
90,255

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

20


7.      Unconsolidated Investments
The Company's unconsolidated investments consist of the following for the periods presented below (in thousands):
 
 
 
 
 
Percentage of Ownership
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
2017
 
2016
 
2017
 
2016
South Kent
$
3,732

 
$
1,537

 
50.0
%
 
50.0
%
Grand
5,758

 
3,459

 
45.0
%
 
45.0
%
K2
102,019

 
97,051

 
33.3
%
 
33.3
%
Armow
133,063

 
131,247

 
50.0
%
 
50.0
%
PEGH 2
59,261



 
20.2
%

NA

Unconsolidated investments
$
303,833

 
$
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 primarily attributable to property, plant and equipment, PPAs, and equity method goodwill. The Company amortizes the basis difference attributable to property, plant and equipment, and PPAs over their useful life and contractual life, respectively. The Company does not amortize equity method goodwill. For the three and nine months ended September 30, 2017 , the Company recorded basis difference amortization for its unconsolidated investments of $2.9 million and $8.5 million , respectively, and for the same periods in 2016 , the Company recorded basis difference amortization of $1.3 million and $3.8 million , respectively, in earnings (loss) 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 September 30, 2017 , none of the Company's unconsolidated investments were in suspension. As of September 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 (loss) in unconsolidated investments, net as reported on the consolidated statements of operations attributable to South Kent and Grand included $5.8 million and $15.0 million for the three and nine months ended September 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 September 30, 2016 , the memo ledger balance was made up of distributions received in excess of the carrying amount of the Company's investment of $5.8 million , suspended equity losses of $2.7 million and suspended other comprehensive income of $0.5 million .

21


Significant Equity Method Investees
The following table presents summarized statements of operations information for the three and nine months ended September 30, 2017 and 2016 as required for the Company's significant equity method investees, South Kent, Grand, K2, Armow, and PEGH 2 pursuant to Regulation S-X Rule 10-01(b)(1) (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016 (1)
 
2017
 
2016 (1)
Revenue
$
45,008

 
$
40,863

 
$
228,111

 
$
167,426

Cost of revenue
31,550

 
23,768

 
89,288

 
69,367

Operating expenses
11,030

 
459

 
12,663

 
1,928

Other expense
12,062

 
21,553

 
50,038

 
89,820

Net income (loss)
$
(9,634
)
 
$
(4,917
)
 
$
76,122

 
$
6,311

(1)  
Results for the three and nine months ended September 30, 2016 do not include Armow, which was acquired in October 2016 and PEGH 2, which was acquired in July 2017.


22


8.      Debt
The Company’s debt consists of the following for periods presented below (in thousands):
 
 
 
 
 
As of September 30, 2017
 
September 30, 2017
 
December 31, 2016
 
Contractual Interest Rate
 
Effective Interest Rate
 
 
 
 
 
 
 
Maturity
Corporate-level
 
 
 
 
 
 
 
 
 
Revolving Credit Facility
$
253,000

 
$
180,000

 
varies

(1)  
4.23
%
(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
99,112

 
103,904

 
5.56
%
 
5.56
%
 
March 2029
Santa Isabel term loan
104,540

 
107,090

 
4.57
%
 
4.57
%
 
September 2033
Variable interest rate
 
 
 
 
 
 
 
 
 
Ocotillo commercial term loan (2)
179,298

 
193,257

 
3.33
%
 
4.09
%
(3)  
August 2020
Lost Creek term loan (4)

 
103,846

 
N/A

 
N/A


N/A
El Arrayán commercial term loan
90,102

 
94,458

 
4.25
%
 
5.72
%
(3)  
March 2029
Spring Valley term loan
127,392

 
130,658

 
3.09
%
 
5.19
%
(3)  
June 2030
Ocotillo development term loan
101,200

 
102,300

 
3.43
%
 
4.44
%
(3)  
August 2033
St. Joseph term loan (2)
174,413

 
162,356

 
3.04
%
 
3.89
%
(3)  
November 2033
Western Interconnect term loan (2)
54,395

 

 
3.34
%
 
4.23
%
(3)  
April 2027
Meikle term loan (2)
271,042

 

 
2.92
%
 
3.89
%
(3)  
May 2024
Imputed interest rate
 
 
 
 
 
 
 
 
 
Hatchet Ridge financing lease obligation
196,363

 
202,593

 
1.43
%
 
1.43
%
 
December 2032
 
2,225,857

 
1,605,462

 
 
 
 
 
 
Unamortized premium/discount, net  (4)
(14,673
)
 
(17,019
)
 
 
 
 
 
 
Unamortized financing costs
(28,364
)
 
(24,771
)
 
 
 
 
 
 
Total debt, net
$
2,182,820

 
1,563,672

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As reflected on the consolidated balance sheets
 
 
 
 
 
 
 
 
 
Revolving credit facility
$
253,000

 
$
180,000

 
 
 
 
 
 
Current portion of long-term debt, net of financing costs
58,213

 
48,716

 
 
 
 
 
 
Long term debt, net of financing costs
1,871,607

 
1,334,956

 
 
 
 
 
 
Total debt, net
$
2,182,820

 
$
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, the Western Interconnect term loan and the Meikle term loan are through June 2030, September 2036, March 2036 and December 2038, respectively, which differs from the stated maturity date of such loans due to prepayment requirements.
(3)  
Includes impact of interest rate swaps. See Note 10 , Derivative Instruments , for discussion of interest rate swaps.
(4)  
The discount relates to the 2020 Notes and the premium relates to the Lost Creek term loan as of December 31, 2016, as the Lost Creek term loan was terminated in September 2017.

23


Interest and commitment fees incurred and interest expense for debt consisted of the following (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Corporate-level interest and commitment fees incurred
$
9,215

 
$
4,200

 
$
24,827

 
$
14,205

Project-level interest and commitment fees incurred (1)
14,635

 
12,611

 
40,103

 
39,055

Amortization of debt discount/premium, net
1,153

 
1,073

 
3,379

 
3,147

Amortization of financing costs
2,028

 
1,745

 
5,879

 
5,242

Other interest
116

 
169

 
353

 
485

Interest expense
$
27,147

 
$
19,798

 
$
74,541

 
$
62,134

(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 September 30, 2017 , $210.7 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 September 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%