Pattern Energy Group Inc.
Pattern Energy Group Inc. (Form: 10-Q, Received: 05/09/2017 06:10:01)
 
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 March 31, 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 May 4, 2017 there were 87,616,747 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 MARCH 31, 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)
 
March 31,
 
December 31,

2017
 
2016
Assets

 

Current assets:

 

Cash and cash equivalents (Note 4)
$
244,675

 
$
83,932

Restricted cash (Note 4)
8,493

 
11,793

Funds deposited by counterparty
41,977

 
43,635

Trade receivables (Note 4)
45,998

 
37,510

Derivative assets, current
18,098

 
17,578

Prepaid expenses (Note 4)
12,857

 
13,803

Deferred financing costs, current, net of accumulated amortization of $9,964 and $9,350 as of March 31, 2017 and December 31, 2016, respectively
2,449

 
2,456

Other current assets (Note 4)
11,387

 
7,350

Total current assets
385,934

 
218,057

Restricted cash (Note 4)
17,117

 
13,646

Property, plant and equipment, net
3,095,179

 
3,135,162

Unconsolidated investments
232,735

 
233,294

Derivative assets
23,385

 
26,712

Deferred financing costs
3,370

 
4,052

Net deferred tax assets
5,903

 
5,559

Finite-lived intangible assets, net
90,202

 
91,895

Other assets (Note 4)
21,399

 
24,390

Total assets
$
3,875,224

 
$
3,752,767

Liabilities and equity

 

Current liabilities:

 

Accounts payable and other accrued liabilities (Note 4)
$
26,847

 
$
31,305

Accrued construction costs (Note 4)
848

 
1,098

Counterparty deposit liability
41,977

 
43,635

Accrued interest (Note 4)
6,802

 
9,545

Dividends payable
36,527

 
35,960

Derivative liabilities, current
11,877

 
11,918

Revolving credit facility

 
180,000

Current portion of long-term debt, net
50,715

 
48,716

Other current liabilities (Note 4)
3,723

 
4,698

Total current liabilities
179,316

 
366,875

Long-term debt, net
1,669,680

 
1,334,956

Derivative liabilities
21,553

 
24,521

Net deferred tax liabilities
37,435

 
31,759

Finite-lived intangible liability, net
53,796

 
54,663

Other long-term liabilities (Note 4)
65,212

 
61,249

Total liabilities
2,026,992

 
1,874,023

Commitments and contingencies (Note 12)


 


Equity:

 

Class A common stock, $0.01 par value per share: 500,000,000 shares authorized; 87,616,747 and 87,410,687 shares outstanding as of March 31, 2017 and December 31, 2016, respectively
877

 
875

Additional paid-in capital
1,110,412

 
1,145,760

Accumulated loss
(88,617
)
 
(94,270
)
Accumulated other comprehensive loss
(57,492
)
 
(62,367
)
Treasury stock, at cost; 110,964 and 110,964 shares of Class A common stock as of March 31, 2017 and December 31, 2016, respectively
(2,500
)
 
(2,500
)
Total equity before noncontrolling interest
962,680

 
987,498

Noncontrolling interest
885,552

 
891,246

Total equity
1,848,232

 
1,878,744

Total liabilities and equity
$
3,875,224

 
$
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 March 31,
 
2017
 
2016
Revenue:
 
 
 
Electricity sales
$
98,434

 
$
85,663

Other revenue
2,399

 
1,976

Total revenue
100,833

 
87,639

Cost of revenue:
 
 
 
Project expense
29,170

 
32,246

Depreciation and accretion
43,740

 
43,411

Total cost of revenue
72,910

 
75,657

Gross profit
27,923

 
11,982

Operating expenses:
 
 
 
General and administrative (Note 13)
11,124

 
8,562

Related party general and administrative
3,426

 
1,897

Total operating expenses
14,550

 
10,459

Operating income
13,373

 
1,523

Other income (expense):
 
 
 
Interest expense
(22,555
)
 
(21,061
)
Loss on undesignated derivatives, net
(648
)
 
(13,631
)
Earnings in unconsolidated investments
16,876

 
3,830

Net (loss) gain on transactions
(312
)
 
33

Other income, net
580

 
1,556

Total other expense
(6,059
)
 
(29,273
)
Net income (loss) before income tax
7,314

 
(27,750
)
Tax provision
4,775

 
1,298

Net income (loss)
2,539

 
(29,048
)
Net loss attributable to noncontrolling interest
(3,114
)
 
(5,378
)
Net income (loss) attributable to Pattern Energy
$
5,653

 
$
(23,670
)
 
 
 
 
Weighted-average number of common shares outstanding
 
 
 
Basic
87,062,612

 
74,437,998

Diluted
87,131,280

 
74,437,998

Earnings (loss) per share attributable to Pattern Energy
 
 
 
Basic and diluted
$
0.06

 
$
(0.32
)
Dividends declared per Class A common share
$
0.41

 
$
0.38


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 March 31,
 
 
2017
 
2016
Net income (loss)
 
$
2,539

 
$
(29,048
)
Other comprehensive income (loss):
 
 
 
 
Foreign currency translation, net of zero tax impact
 
2,463

 
10,862

Derivative activity:
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax benefit of $39 and $2,723, respectively
 
(541
)
 
(20,697
)
Reclassifications to net income (loss), net of tax impact of $251 and $302, respectively
 
2,319

 
2,902

Total change in effective portion of change in fair market value of derivatives
 
1,778

 
(17,795
)
Proportionate share of equity investee’s derivative activity:
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax benefit of $779 and $2,673, respectively
 
(2,160
)
 
(7,414
)
Reclassifications to net income(loss), net of tax impact of $1,032 and $452, respectively
 
2,861

 
1,253

Total change in effective portion of change in fair market value of derivatives
 
701

 
(6,161
)
Total other comprehensive income (loss), net of tax
 
4,942

 
(13,094
)
Comprehensive income (loss)
 
7,481

 
(42,142
)
Less comprehensive loss attributable to noncontrolling interest:
 
 
 
 
Net loss attributable to noncontrolling interest
 
(3,114
)
 
(5,378
)
Derivative activity:
 
 
 
 
Effective portion of change in fair market value of derivatives, net of tax benefit of $8 and $343, respectively
 
(21
)
 
(928
)
Reclassifications to net loss, net of tax impact of $33 and $47, respectively
 
88

 
128

Total change in effective portion of change in fair market value of derivatives
 
67

 
(800
)
Comprehensive loss attributable to noncontrolling interest
 
(3,047
)
 
(6,178
)
Comprehensive income (loss) attributable to Pattern Energy
 
$
10,528

 
$
(35,964
)
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

 

 
(1,075
)
 
(19
)
 

 

 

 
(19
)
 

 
(19
)
Stock-based compensation

 

 

 

 
1,195

 

 

 
1,195

 

 
1,195

Dividends declared

 

 

 

 
(28,567
)
 

 

 
(28,567
)
 

 
(28,567
)
Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(3,917
)
 
(3,917
)
Other

 

 

 

 
16

 

 

 
16

 
(465
)
 
(449
)
Net loss

 

 

 

 

 
(23,670
)
 

 
(23,670
)
 
(5,378
)
 
(29,048
)
Other comprehensive loss, net of tax

 

 

 

 

 

 
(12,294
)
 
(12,294
)
 
(800
)
 
(13,094
)
Balances at March 31, 2016
74,997,346

 
$
750

 
(66,376
)
 
$
(1,596
)
 
$
955,455

 
$
(100,829
)
 
$
(85,619
)
 
$
768,161

 
$
933,702

 
$
1,701,863

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
206,060

 
2

 

 

 
(2
)
 

 

 

 

 

Stock-based compensation

 

 

 

 
985

 

 

 
985

 

 
985

Dividends declared

 

 

 

 
(36,258
)
 

 

 
(36,258
)
 

 
(36,258
)
Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(2,647
)
 
(2,647
)
Other

 

 

 

 
(73
)
 

 

 
(73
)
 

 
(73
)
Net income (loss)

 

 

 

 

 
5,653

 

 
5,653

 
(3,114
)
 
2,539

Other comprehensive income, net of tax

 

 

 

 

 

 
4,875

 
4,875

 
67

 
4,942

Balances at March 31, 2017
87,727,711

 
$
877

 
(110,964
)
 
$
(2,500
)
 
$
1,110,412

 
$
(88,617
)
 
$
(57,492
)
 
$
962,680

 
$
885,552

 
$
1,848,232


See accompanying notes to consolidated financial statements.

8


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

 
Three months ended March 31,

2017
 
2016
Operating activities

 

Net income (loss)
$
2,539

 
$
(29,048
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 


Depreciation and accretion
43,740

 
43,411

Amortization of financing costs
1,858

 
1,746

Amortization of debt discount/premium, net
1,102

 
1,032

Amortization of power purchase agreements, net
736

 
753

Loss on derivatives, net
2,350

 
17,757

Stock-based compensation
985

 
1,195

Deferred taxes
4,693

 
1,143

Earnings in unconsolidated investments, net
(16,876
)
 
(3,517
)
Distributions from unconsolidated investments
16,487

 

Other reconciling items
(439
)
 
(784
)
Changes in operating assets and liabilities:


 


Funds deposited by counterparty
1,658

 
(61,177
)
Trade receivables
(8,432
)
 
3,215

Prepaid expenses
946

 
1,360

Other current assets
(4,083
)
 
1,114

Other assets (non-current)
2,992

 
(236
)
Accounts payable and other accrued liabilities
(4,418
)
 
(18,671
)
Counterparty deposit liability
(1,658
)
 
61,177

Accrued interest
(2,725
)
 
(6,235
)
Other current liabilities
(975
)
 
(1,218
)
Long-term liabilities
3,272

 
1,704

Net cash provided by operating activities
43,752

 
14,721

Investing activities

 

Cash paid for acquisitions, net of cash acquired
(275
)
 

Capital expenditures
(1,328
)
 
(24,084
)
Distributions from unconsolidated investments
4,205

 
19,814

Other investing activities
83

 
(125
)
Net cash provided by (used in) investing activities
2,685

 
(4,395
)

9


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

 
Three months ended March 31,

2017
 
2016
Financing activities

 

Dividends paid
(35,522
)
 
(27,711
)
Capital distributions - noncontrolling interest
(2,647
)
 
(3,917
)
Payment for deferred financing costs
(5,025
)
 

Proceeds from revolving credit facility

 
20,000

Repayment of revolving credit facility
(180,000
)
 
(20,000
)
Proceeds from long-term debt
350,000

 

Repayment of long-term debt
(10,326
)
 
(8,943
)
Other financing activities
(2,003
)
 
(143
)
Net cash provided by (used in) financing activities
114,477

 
(40,714
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash

 
1,837

Net change in cash, cash equivalents and restricted cash
160,914

 
(28,551
)
Cash, cash equivalents and restricted cash at beginning of period
109,371

 
146,292

Cash, cash equivalents and restricted cash at end of period
$
270,285

 
$
117,741

Supplemental disclosures

 

Cash payments for income taxes
$
247

 
$
97

Cash payments for interest expense, net of capitalized interest
$
22,607

 
$
24,204

Schedule of non-cash activities


 


Change in property, plant and equipment
$
956

 
$
11,599

Accrual of deferred financing costs
$
1,640

 
$


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 19% 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 (other than the Company and the Company's 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 Pattern Panhandle Wind LLC (Panhandle 1), Pattern Panhandle Wind 2 LLC (Panhandle 2), Post Rock Wind Power Project, LLC (Post Rock), Logan's Gap Wind LLC (Logan's Gap) and Fowler Ridge IV Wind Farm LLC (Amazon Wind Farm Fowler Ridge));
Pattern Canada Operations Holdings ULC (which consists primarily of 100% ownership of St. Joseph Windfarm Inc. (St. Joseph) and noncontrolling interests in South Kent Wind LP (South Kent), Grand Renewable Wind LP (Grand), 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 April 21, 2017, the Company acquired controlling interests in the two wind projects that comprise the 324 megawatt (MW) Broadview Wind power facilities (Broadview) and associated independent 35 -mile 345 kV Western Interconnect transmission line (Western Interconnect) from Pattern Development 1.0 (Broadview Transaction). See Note 14, Subsequent Events in the Notes to Consolidated Financial Statements in this Form 10-Q, for further discussion.
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 March 31, 2017 , the results of operations and comprehensive income (loss) for the three months ended March 31, 2017 and 2016 , respectively, and the cash flows for the three months ended March 31, 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 three months ended March 31, 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.
 
 
March 31,
2017
 
December 31,
2016
 
March 31,
2016
December 31,
2015
Cash and cash equivalents
 
$
244,675

 
$
83,932

 
$
90,624

$
94,808

Restricted cash - current
 
8,493

 
11,793

 
10,282

14,609

Restricted cash
 
17,117

 
13,646

 
16,835

36,875

Cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
 
$
270,285

 
$
109,371

 
$
117,741

$
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 February 2016, the Financial Accounting Standards Board (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 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

12


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 does not plan to early adopt, and accordingly, 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.

3.      Property, Plant and Equipment
The following presents the categories within property, plant and equipment (in thousands):
 
March 31,
 
December 31,
 
2017
 
2016
Operating wind farms
$
3,711,183

 
$
3,707,823

Furniture, fixtures and equipment
9,608

 
9,307

Land
141

 
141

Subtotal
3,720,932

 
3,717,271

Less: accumulated depreciation
(625,753
)
 
(582,109
)
Property, plant and equipment, net
$
3,095,179

 
$
3,135,162

The Company recorded depreciation expense related to property, plant and equipment of $43.0 million and $42.7 million for the three months ended March 31, 2017 and 2016, respectively.

13


4.      Variable Interest Entities
The Company has determined that Logan's Gap, Panhandle 1, Panhandle 2, Post Rock and Amazon Wind Farm Fowler Ridge 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 Accounting Standards Codification (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 following presents the carrying amounts of the consolidated VIEs' assets and liabilities included in the consolidated balance sheet (in thousands). Assets presented below are restricted for settlement of the consolidated VIEs' obligations and all liabilities presented below can only be settled using the VIE resources.
 
March 31,
2017
 
December 31,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
13,109

 
$
12,745

Restricted cash
4,295

 
4,291

Trade receivables
7,876

 
6,290

Prepaid expenses
3,914

 
4,468

Other current assets
1,194

 
1,456

Total current assets
30,388

 
29,250

 
 
 
 
Restricted cash
2,354

 
3,203

Property, plant and equipment, net
1,520,762

 
1,538,793

Finite-lived intangible assets, net
2,027

 
2,070

Other assets
13,582

 
13,622

Total assets
$
1,569,113

 
$
1,586,938

 
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued liabilities
$
5,193

 
12,635

Accrued construction costs
473

 
709

Accrued interest
75

 
77

Other current liabilities
1,551

 
2,090

Total current liabilities
7,292

 
15,511

 
 
 
 
Finite-lived intangible liability, net
53,796

 
54,663

Other long-term liabilities
23,420

 
20,081

Total liabilities
$
84,508

 
$
90,255


14


5.      Unconsolidated Investments
The Company's unconsolidated investments consist of the following for the periods presented below (in thousands):
 
 
 
 
 
Percentage of Ownership
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
2017
 
2016
 
2017
 
2016
South Kent
$
4,277

 
$
1,537

 
50.0
%
 
50.0
%
Grand
4,695

 
3,459

 
45.0
%
 
45.0
%
K2
95,899

 
97,051

 
33.3
%
 
33.3
%
Armow
127,864

 
131,247

 
50.0
%
 
50.0
%
Unconsolidated investments
$
232,735

 
$
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 months ended March 31, 2017 and 2016 , the Company recorded basis difference amortization for its unconsolidated investments of $2.8 million and $1.2 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-10K, 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 recognizes such excess distributions as equity method earnings 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 will not recognize equity in earnings (losses) or equity in other comprehensive income of unconsolidated investments.
During the three months ended March 31, 2017, none of the Company's unconsolidated investments were in suspension. During the three months ended March 31, 2016, the Company's equity method balance for South Kent was zero. In accordance with ASC 323, Investments - Equity Method and Joint Ventures , the Company suspended recognition of South Kent's equity method earnings or losses until the fourth quarter of 2016 when South Kent's 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. For the three months ended March 31, 2016, earnings in unconsolidated investments, net as reported on the consolidated statements of operations attributable to South Kent included $1.7 million 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 March 31, 2016, the memo ledger balance was made up of distributions received in excess of the carrying amount of the Company's investment of $1.7 million .

15


Aggregate Financial Data for Unconsolidated Investees
The following summarizes the statements of operations, in aggregate, for the unconsolidated investees (in thousands):
 
 
Three months ended March 31,
 
 
2017
 
2016 (1)
Revenue
 
$
100,359

 
$
72,416

Cost of revenue
 
29,589

 
22,427

Operating expenses
 
714

 
446

Other expense
 
22,841

 
38,090

Net income
 
$
47,215

 
$
11,453

(1)  
Results for the three months ended March 31, 2016 does 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 months ended March 31, 2017 and 2016 , in thousands, as required for the Company's significant equity method investees, South Kent, K2 and Armow pursuant to Regulation S-X Rule 10-01(b)(1):
South Kent
 
 
Three months ended March 31,
 
 
2017
 
2016
Revenue
 
$
32,154

 
$
28,529

Cost of revenue
 
8,452

 
7,996

Operating expenses
 
189

 
189

Other expense
 
6,143

 
19,689

Net income
 
$
17,370

 
$
655

K2
 
 
Three months ended March 31,
 
 
2017
 
2016
Revenue
 
$
32,540

 
$
29,850

Cost of revenue
 
9,765

 
9,576

Operating expenses
 

 

Other expenses
 
7,180

 
7,177

Net income
 
$
15,595

 
$
13,097

Armow
 
Three months ended March 31,
 
2017
 
2016
Revenue (1)
$
21,208

 
N/A
Cost of revenue (1)
6,113

 
N/A
Operating expenses (1)
271

 
N/A
Other expenses (1)
4,383

 
N/A
Net income (1)
$
10,441

 
N/A
(1)    Results for the three months ended March 31, 2016 does not include Armow, which was acquired in October 2016.

16



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

 
$
180,000

 
varies

(1)  
varies

(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
106,165

 
107,090

 
4.57
%
 
4.57
%
 
September 2033
Variable interest rate
 
 
 
 
 
 
 
 
 
Ocotillo commercial term loan (2)
193,257

 
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
128,810

 
130,658

 
2.90
%
 
5.24
%
(3)  
June 2030
Ocotillo development term loan
102,300

 
102,300

 
3.25
%
 
4.42
%
(3)  
August 2033
St. Joseph term loan (2)
163,674

 
162,356

 
2.57
%
 
3.85
%
(3)  
November 2033
Imputed interest rate
 
 
 
 
 
 
 
 
 
Hatchet Ridge financing lease obligation
202,593

 
202,593

 
1.43
%
 
1.43
%
 
December 2032
 
1,766,641

 
1,605,462

 
 
 
 
 
 
Unamortized premium/discount, net  (4)
(15,917
)
 
(17,019
)
 
 
 
 
 
 
Unamortized financing costs
(30,329
)
 
(24,771
)
 
 
 
 
 
 
Total debt, net
$
1,720,395

 
1,563,672

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As reflected on the consolidated balance sheets
 
 
 
 
 
 
 
 
 
Revolving credit facility
$

 
$
180,000

 
 
 
 
 
 
Current portion of long-term debt, net of financing costs
50,715

 
48,716

 
 
 
 
 
 
Long term debt, net of financing costs
1,669,680

 
1,334,956

 
 
 
 
 
 
Total debt, net
$
1,720,395

 
$
1,563,672

 
 
 
 
 
 
(1)  
Refer to Revolving Credit Facility for interest rate details.
(2)  
The amortization for the Ocotillo commercial term loan and the St. Joseph term loan are through June 2030 and September 2036, respectively, which differs from the stated maturity date of such loans due to prepayment requirements.
(3)  
Includes impact of interest rate derivatives. See Note 7 , 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.

17


Interest and commitment fees incurred and interest expense for debt consisted of the following (in thousands):
 
Three months ended March 31,
 
2017
 
2016
Corporate-level interest, letter of credit and commitment fees incurred
$
7,115

 
$
5,053

Project-level interest, letter of credit and commitment fees incurred (1)
12,361

 
13,088

Amortization of debt discount/premium, net
1,102

 
1,032

Amortization of financing costs
1,858

 
1,746

Other interest
119

 
142

Interest expense
$
22,555

 
$
21,061

(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 March 31, 2017 , $471.8 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 March 31, 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 March 31, 2017 and December 31, 2016 , letters of credit of $28.2 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

18


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):
 
March 31,
2017
 
December 31,
2016
Principal
$
225,000

 
$
225,000

Less:

 

Unamortized debt discount
(17,046
)
 
(18,196
)
Unamortized financing costs
(3,622
)
 
(3,894
)
Carrying value of convertible senior notes
$
204,332

 
$
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.
7.      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 March 31, 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.

19


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):
 
 
March 31, 2017
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Current
 
Long-Term
 
Current
 
Long-Term
Fair Value of Designated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
282

 
$
8,634

 
$
18,393

 
 
 
 
 
 
 
 
 
Fair Value of Undesignated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
2,077

 
$
2,783

 
$
3,117

Energy derivative
 
17,563

 
20,996

 

 

Foreign currency forward contracts
 
535

 
30

 
460

 
43

 
 
 
 
 
 
 
 
 
Total Fair Value
 
$
18,098

 
$
23,385

 
$
11,877

 
$
21,553

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Current
 
Long-Term
 
Current
 
Long-Term
Fair Value of Designated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
40

 
$
8,289

 
$
21,058

 
 
 
 
 
 
 
 
 
Fair Value of Undesignated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
1,788

 
$
3,238

 
$
3,463

Energy derivative
 
16,209

 
24,707

 

 

Foreign currency forward contracts
 
1,369

 
177

 
391

 

 
 
 
 
 
 
 
 
 
Total Fair Value
 
$
17,578

 
$
26,712

 
$
11,918

 
$
24,521

The following table summarizes the notional amounts of the Company's outstanding derivative instruments (in thousands except for MWh):
 
 
Unit of Measure
 
March 31,
 
December 31,
 
 
 
2017
 
2016
Designated Derivative Instruments
 
 
 
 
 
 
Interest rate swaps
 
USD
 
$
360,849

 
$
365,443

Interest rate swaps
 
CAD
 
$
196,200

 
$
196,425

 
 
 
 
 
 
 
Undesignated Derivative Instruments
 
 
 
 
 
 
Interest rate swaps
 
USD
 
$
255,292

 
$
257,389

Energy derivative
 
MWh
 
1,061,077

 
1,201,691

Foreign currency forward contracts
 
CAD
 
$
136,500

 
$
95,800



20


Derivatives Designated as Hedging Instruments
Cash Flow Hedges
The Company has interest rate swap agreements to hedge variable rate project-level debt. Under these interest rate swaps, the projects make fixed-rate interest payments and the counterparties to the agreements make variable-rate interest payments. For interest swaps that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the period or periods during which a cash settlement occurs. The designated interest rate swaps have remaining maturities ranging from approximately 10.5 years to 19.5 years .
The following table presents the pre-tax effect of the derivative instruments designated as cash flow recognized in accumulated other comprehensive loss, as well as amounts reclassified to earnings for the following periods (in thousands):
 
 
 
 
Three months ended March 31,
 
 
Description
 
2017
 
2016
Losses recognized in accumulated OCI
 
Effective portion of change in fair value
 
$
(580
)
 
$
(23,420
)
Losses reclassified from accumulated OCI into:
 
 
 
 
 
 
Interest expense
 
Derivative settlements
 
$
(2,570
)
 
$
(3,204
)
Interest expense
 
Ineffective portion
 
$
(11
)
 
$
(89
)
The Company estimates that $6.4 million in accumulated other comprehensive income (loss) will be reclassified into earnings over the next twelve months.
Derivatives Not Designated as Hedging Instruments
The following table presents gains and losses on derivatives not designated as hedges (in thousands):
 
 
Financial Statement Line Item
 
 
 
Three months ended March 31,
Derivative Type
 
 
Description
 
2017
 
2016
Interest rate derivatives
 
Loss on undesignated derivatives, net
 
Change in fair value, net of settlements
 
$
1,090

 
$
(8,881
)
Interest rate derivatives
 
Loss on undesignated derivatives, net
 
Derivative settlements
 
$
(968
)
 
$
(1,326
)
Energy derivative
 
Electricity sales
 
Change in fair value, net of settlements
 
$
(2,358
)
 
$
(4,825
)
Energy derivative
 
Electricity sales
 
Derivative settlements
 
$
6,015

 
$
6,733

Foreign currency forward contracts
 
Loss on undesignated derivatives, net
 
Change in fair value, net of settlements
 
$
(1,094
)
 
$
(3,961
)
Foreign currency forward contracts
 
Loss on undesignated derivatives, net
 
Derivative settlements
 
$
324

 
$
537

Interest Rate Swaps
The Company has interest rate swap agreements to hedge variable rate project-level debt. Under these interest rate swaps, the projects make fixed-rate interest payments and the counterparties to the agreements make variable-rate interest payments. For interest rate swaps that are not designated and do not qualify as cash flow hedges, the changes in fair value are recorded in loss on undesignated derivatives, net in the consolidated statements of operations as these hedges are not accounted for under hedge accounting. The undesignated interest rate swaps have remaining maturities ranging from approximately 4.0 years to 13.3 years .
Energy Derivative
In 2010, Gulf Wind acquired an energy derivative instrument to manage its exposure to variable electricity prices over the life of the arrangement. The energy price swap fixes the price for a predetermined volume of production (the notional volume) over the life of the swap contract, through April 2019 , by locking in a fixed price per MWh. The notional volume agreed to by the parties is approximately 504,220 MWh per year. The energy derivative instrument does not meet the criteria required to adopt hedge accounting. As a result, changes in fair value are recorded in electricity sales in the consolidated statements of operations.

21


As a result of the counterparty's credit rating downgrade, the Company received cash collateral related to the energy derivative agreement. The Company does not have the right to pledge, invest, or use the cash collateral for general corporate purposes. As of March 31, 2017 , the Company has recorded a current asset of $42.0 million to funds deposited by counterparty and a current liability of $42.0 million to counterparty deposit liability representing the cash collateral received and corresponding obligation to return the cash collateral, respectively. The cash was deposited into a separate custodial account for which the Company is not entitled to the interest earned on the cash collateral.
Foreign Currency Forward Contracts
The Company has established a currency risk management program. The objective of the program is to mitigate the foreign exchange rate risk arising from transactions or cash flows that have a direct or underlying exposure in non-U.S. dollar denominated currencies in order to reduce volatility in the Company’s cash flow, which may have an adverse impact to the Company's short-term liquidity or financial condition. A majority of the Company’s power sale agreements and operating expenditures are transacted in U.S. dollars, with a growing portion transacted in currencies other than the U.S. dollar, primarily the Canadian dollar. The Company enters into foreign currency forward contracts at various times to mitigate the currency exchange rate risk on Canadian dollar denominated cash flows. These instruments have remaining maturities ranging from two to twenty-four months. The foreign currency forward contracts are considered non-designated derivative instruments and are not used for trading or speculative purposes. As a result, changes in fair value and settlements are recorded in loss on undesignated derivatives, net in the consolidated statements of operations.
8.      Accumulated Other Comprehensive Loss
The following tables summarize the changes in the accumulated other comprehensive loss balance, net of tax, by component (in thousands):
 
Foreign Currency
 
Effective Portion of Change in Fair Value of Derivatives
 
Proportionate Share of Equity Investee’s OCI
 
Total
Balances at December 31, 2015
$
(48,285
)
 
$
(13,462
)
 
$
(12,131
)
 
$
(73,878
)
Other comprehensive income (loss) before reclassifications
10,862

 
(20,697
)
 
(7,414
)
 
(17,249
)
Amounts reclassified from accumulated other comprehensive loss

 
2,902

 
1,253

 
4,155

Net current period other comprehensive income (loss)
10,862

 
(17,795
)
 
(6,161
)
 
(13,094
)
Balances at March 31, 2016
$
(37,423
)
 
$
(31,257
)
 
$
(18,292
)
 
$
(86,972
)
Less: accumulated other comprehensive loss attributable to noncontrolling interest, March 31, 2016

 
(1,353
)
 

 
(1,353
)
Accumulated other comprehensive loss attributable to Pattern Energy, March 31, 2016
$
(37,423
)
 
$
(29,904
)
 
$
(18,292
)
 
$
(85,619
)
 
Foreign Currency
 
Effective Portion of Change in Fair Value of Derivatives
 
Proportionate Share of Equity Investee’s OCI
 
Total
Balances at December 31, 2016
$
(43,500
)
 
$
(12,751
)
 
$
(6,498
)
 
$
(62,749
)
Other comprehensive income (loss) before reclassifications
2,463

 
(541
)
 
(2,160
)
 
(238
)
Amounts reclassified from accumulated other comprehensive loss

 
2,319

 
2,861

 
5,180

Net current period other comprehensive income
2,463

 
1,778

 
701

 
4,942

Balances at March 31, 2017
$
(41,037
)
 
$
(10,973
)
 
$
(5,797
)
 
$
(57,807
)
Less: accumulated other comprehensive loss attributable to noncontrolling interest, March 31, 2017

 
(315
)
 

 
(315
)
Accumulated other comprehensive loss attributable to Pattern Energy, March 31, 2017
$
(41,037
)
 
$
(10,658
)
 
$
(5,797
)
 
$
(57,492
)
Amounts reclassified from accumulated other comprehensive loss into net income (loss) for the effective portion of change in fair value of derivatives is recorded to interest expense in the consolidated statements of operations. Amounts reclassified from accumulated other comprehensive loss into net income (loss) for the Company’s proportionate share of equity investee’s other comprehensive loss is recorded to earnings in unconsolidated investments, net in the consolidated statements of operations.

22


9.      Fair Value Measurements
The Company’s fair value measurements incorporate various factors, including the credit standing and performance risk of the counterparties, the applicable exit market, and specific risks inherent in the instrument. Nonperformance and credit risk adjustments on risk management instruments are based on current market inputs when available, such as credit default hedge spreads. When such information is not available, internal models may be used.
Assets and liabilities recorded at fair value in the consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to valuation of these assets or liabilities are set forth below. Transfers between levels are recognized at the end of each quarter. The Company did not recognize any transfers between levels during the periods presented.
Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuations technique and the risk inherent in the inputs to the model.
Financial Instruments
The carrying value of financial instruments classified as current assets and current liabilities approximates their fair value, based on the nature and short maturity of these instruments, and they are presented in the Company’s financial statements at carrying cost. The fair values of cash and cash equivalents and restricted cash are classified as Level 1 in the fair value hierarchy. Certain other assets and liabilities were measured at fair value upon initial recognition and unless conditions give rise to an impairment, are not remeasured.
Financial Instruments Measured at Fair Value on a Recurring Basis
The Company’s financial assets and liabilities which require fair value measurement on a recurring basis are classified within the fair value hierarchy as follows (in thousands):
 
March 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
2,359

 
$

 
$
2,359

Energy derivative

 


 
38,559

 
38,559

Foreign currency forward contracts

 
565

 

 
565

 
$

 
$
2,924

 
$
38,559

 
$
41,483

Liabilities
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
32,927

 
$

 
$
32,927

Foreign currency forward contracts

 
503

 

 
503

 
$

 
$
33,430

 
$

 
$
33,430


23


 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
1,828

 
$

 
$
1,828

Energy derivative

 

 
40,916

 
40,916

Foreign currency forward contracts

 
1,546

 

 
1,546

 
$

 
$
3,374

 
$
40,916

 
$
44,290

Liabilities
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
36,048

 
$

 
$
36,048

Foreign currency forward contracts

 
391