Pattern Energy Group Inc.
Pattern Energy Group Inc. (Form: 10-Q, Received: 05/10/2018 07:03:37)
 
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, 2018 .
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-36087
 
 
 
PATTERN ENERGY GROUP INC.
(Exact name of Registrant as specified in its charter)
 
 
 
Delaware
 
90-0893251
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Pier 1, Bay 3, San Francisco, CA 94111
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (415) 283-4000
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes       No  
As of May 7, 2018 there were 98,096,760 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, 2018
TABLE OF CONTENTS
 
 
PART I. FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
Item 1A.
Item 6.
 



2


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

3


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


4


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

2018
 
2017
Assets

 

Current assets:

 

Cash and cash equivalents (Note 7)
$
162,144

 
$
116,753

Restricted cash (Note 7)
8,698

 
9,065

Funds deposited by counterparty
17,744

 
29,780

Trade receivables (Note 7)
62,895

 
54,900

Derivative assets, current
15,747

 
19,445

Prepaid expenses (Note 7)
17,707

 
17,847

Deferred financing costs, current, net of accumulated amortization of $2,111 and $2,580 as of March 31, 2018 and December 31, 2017, respectively
1,230

 
1,415

Other current assets (Note 7)
28,948

 
21,105

Total current assets
315,113

 
270,310

Restricted cash (Note 7)
9,524

 
12,162

Major equipment advances
38,452

 

Property, plant and equipment, net (Note 7)
4,340,973

 
3,965,121

Unconsolidated investments
347,831

 
311,223

Derivative assets
13,779

 
9,628

Deferred financing costs
8,046

 
7,784

Net deferred tax assets
7,215

 
6,349

Finite-lived intangible assets, net (Note 7)
235,952

 
136,048

Goodwill
60,302

 

Other assets (Note 7)
44,455

 
22,906

Total assets
$
5,421,642

 
$
4,741,531

 
 
 
 
Liabilities and equity

 

Current liabilities:

 

Accounts payable and other accrued liabilities (Note 7)
$
39,468

 
$
53,615

Accrued construction costs (Note 7)
2,045

 
1,369

Counterparty deposit liability
17,744

 
29,780

Accrued interest (Note 7)
7,529

 
16,460

Dividends payable
42,041

 
41,387

Derivative liabilities, current
5,685

 
8,409

Revolving credit facility
248,000

 

Current portion of long-term debt, net
61,191

 
51,996

Contingent liabilities, current
21,708


2,592

Other current liabilities (Note 7)
15,525

 
11,426

Total current liabilities
460,936

 
217,034

Long-term debt, net
2,128,063

 
1,878,735

Derivative liabilities
28,425

 
20,972

Net deferred tax liabilities
130,257

 
56,491

Finite-lived intangible liabilities, net
59,579

 
51,194

Contingent liabilities
168,183

 
62,398

Other long-term liabilities (Note 7)
151,430

 
106,565

Total liabilities
3,126,873

 
2,393,389

Commitments and contingencies (Note 16)


 


Equity:

 

Class A common stock, $0.01 par value per share: 500,000,000 shares authorized; 98,096,760 and 97,860,048 shares outstanding as of March 31, 2018 and December 31, 2017, respectively
983

 
980

Additional paid-in capital
1,218,077

 
1,234,846

Accumulated income (loss)

 
(112,175
)
Accumulated other comprehensive loss
(26,810
)
 
(25,691
)
Treasury stock, at cost; 177,909 and 157,812 shares of Class A common stock as of March 31, 2018 and December 31, 2017, respectively
(3,884
)
 
(3,511
)
Total equity before noncontrolling interest
1,188,366

 
1,094,449

Noncontrolling interest
1,106,403

 
1,253,693

Total equity
2,294,769

 
2,348,142

Total liabilities and equity
$
5,421,642

 
$
4,741,531

See accompanying notes to consolidated financial statements.

5


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

 
Three months ended March 31,
 
2018
 
2017
Revenue:
 
 
 
Electricity sales
$
102,147

 
$
98,434

Other revenue
9,512

 
2,399

Total revenue
111,659

 
100,833

Cost of revenue:
 
 
 
Project expense
34,562

 
29,100

Transmission costs
7,190

 
70

Depreciation, amortization and accretion
55,452

 
43,740

Total cost of revenue
97,204

 
72,910

Gross profit
14,455

 
27,923

Operating expenses:
 
 
 
General and administrative
10,706

 
11,124

Related party general and administrative
4,068

 
3,426

Total operating expenses
14,774

 
14,550

Operating income (loss)
(319
)
 
13,373

Other expense:
 
 
 
Interest expense
(25,444
)
 
(22,555
)
Gain (loss) on derivatives
5,660

 
(648
)
Earnings in unconsolidated investments, net
18,212

 
16,876

Net loss on transactions
(1,098
)
 
(312
)
Other income (expense), net
(2,847
)
 
580

Total other expense
(5,517
)
 
(6,059
)
Net income (loss) before income tax
(5,836
)
 
7,314

Tax provision
6,784

 
4,775

Net income (loss)
(12,620
)
 
2,539

Net loss attributable to noncontrolling interest
(148,542
)
 
(3,114
)
Net income attributable to Pattern Energy
$
135,922

 
$
5,653

 
 
 
 
Weighted-average number of common shares outstanding
 
 
 
Basic
97,428,388

 
87,062,612

Diluted
105,564,491

 
87,131,280

Earnings per share attributable to Pattern Energy
 
 
 
Basic
$
1.39

 
$
0.06

Diluted
$
1.32

 
$
0.06

Dividends declared per Class A common share
$
0.42

 
$
0.41


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,
 
2018
 
2017
Net income (loss)
$
(12,620
)
 
$
2,539

Other comprehensive income (loss):
 
 
 
Foreign currency translation, net of zero tax impact
(9,102
)
 
2,463

Derivative activity:
 
 
 
Effective portion of change in fair value of derivatives, net of tax benefit of $946 and $39, respectively
3,745

 
(541
)
Reclassifications to net income (loss), net of tax impact of $265 and $251, respectively
1,396

 
2,319

Total change in effective portion of change in fair value of derivatives
5,141

 
1,778

Proportionate share of equity investee’s derivative activity:
 
 
 
Effective portion of change in fair value of derivatives, net of tax (provision) benefit of ($291) and $779, respectively
808

 
(2,160
)
Reclassifications to net income (loss), net of tax impact of $490 and $1,032, respectively
1,360

 
2,861

Total change in effective portion of change in fair value of derivatives
2,168

 
701

Total other comprehensive income (loss), net of tax
(1,793
)
 
4,942

Comprehensive income (loss)
(14,413
)
 
7,481

Less comprehensive income (loss) attributable to noncontrolling interest:
 
 
 
Net loss attributable to noncontrolling interest
(148,542
)
 
(3,114
)
Foreign currency translation, net of zero tax impact
(1,627
)
 

Derivative activity:
 
 
 
Effective portion of change in fair value of derivatives, net of tax (provision) benefit of ($150) and $8, respectively
606

 
(21
)
Reclassifications to net income (loss), net of tax impact of $28 and $33, respectively
347

 
88

Total change in effective portion of change in fair value of derivatives
953

 
67

Comprehensive loss attributable to noncontrolling interest
(149,216
)
 
(3,047
)
Comprehensive income attributable to Pattern Energy
$
134,803

 
$
10,528

See accompanying notes to consolidated financial statements.

7



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

 
$
875

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

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

 
$
891,246

 
$
1,878,744

Issuance of Class A common stock under equity incentive award plan
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2017
98,017,860

 
$
980

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

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

 
$
1,253,693

 
$
2,348,142

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

 
3

 

 

 
(3
)
 

 

 

 

 

Repurchase of shares for employee tax withholding

 

 
(20,097
)
 
(373
)
 

 

 

 
(373
)
 

 
(373
)
Stock-based compensation

 

 

 

 
1,051

 

 

 
1,051

 

 
1,051

Dividends declared

 

 

 

 
(17,574
)
 
(23,747
)
 

 
(41,321
)
 

 
(41,321
)
Acquisitions

 

 

 

 

 

 

 

 
11,113


11,113

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(9,187
)
 
(9,187
)
Other

 

 

 

 
(243
)
 

 

 
(243
)
 

 
(243
)
Net income (loss)

 

 

 

 

 
135,922

 

 
135,922

 
(148,542
)
 
(12,620
)
Other comprehensive loss, net of tax

 

 

 

 

 

 
(1,119
)
 
(1,119
)
 
(674
)
 
(1,793
)
Balances at March 31, 2018
98,274,669

 
$
983

 
(177,909
)
 
$
(3,884
)
 
$
1,218,077

 
$

 
$
(26,810
)
 
$
1,188,366

 
$
1,106,403

 
$
2,294,769


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,

2018
 
2017
Operating activities

 

Net income (loss)
$
(12,620
)
 
$
2,539

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 


Depreciation and accretion
55,451

 
43,740

Amortization of financing costs
1,249

 
1,858

Amortization of debt discount/premium, net
1,227

 
1,102

Amortization of power purchase agreements, net
1,422

 
736

Loss on derivatives
3,655

 
2,350

Stock-based compensation
1,051

 
985

Deferred taxes
6,647

 
4,693

Earnings in unconsolidated investments, net
(18,212
)
 
(16,876
)
Distributions from unconsolidated investments
13,548

 
16,487

Other reconciling items
2,982

 
(439
)
Changes in operating assets and liabilities:
 
 


Funds deposited by counterparty
12,036

 
1,658

Trade receivables
(5,742
)
 
(8,432
)
Prepaid expenses
2,193

 
946

Other current assets
62

 
(4,083
)
Other assets (non-current)
(1,346
)
 
2,992

Accounts payable and other accrued liabilities
(18,716
)
 
(4,418
)
Counterparty deposit liability
(12,036
)
 
(1,658
)
Accrued interest
(9,144
)
 
(2,725
)
Other current liabilities
72

 
(975
)
Long-term liabilities
3,904

 
3,272

Contingent liabilities
(87
)
 

Derivatives
228

 

Net cash provided by operating activities
27,824

 
43,752

Investing activities

 

Cash paid for acquisitions, net of cash and restricted cash acquired
(157,543
)
 
(275
)
Capital expenditures
(61,282
)
 
(1,328
)
Distributions from unconsolidated investments

 
4,205

Other assets
(16,720
)
 
83

Investment in Pattern Development 2.0
(35,156
)
 

Net cash provided by (used in) investing activities
(270,701
)
 
2,685


9


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

 
Three months ended March 31,

2018
 
2017
Financing activities

 

Dividends paid
(41,358
)
 
(35,522
)
Capital distributions - noncontrolling interest
(9,187
)
 
(2,647
)
Payment for financing fees
(5,448
)
 
(5,025
)
Proceeds from revolving credit facility
283,000

 

Repayment of revolving credit facility
(35,000
)
 
(180,000
)
Proceeds from long-term debt
113,116

 
350,000

Repayment of long-term debt
(19,166
)
 
(10,326
)
Repayment of note payable - related party
(909
)
 

Other financing activities
826

 
(2,003
)
Net cash provided by financing activities
285,874

 
114,477

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(611
)
 

Net change in cash, cash equivalents and restricted cash
42,386

 
160,914

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

 
109,371

Cash, cash equivalents and restricted cash at end of period
$
180,366

 
$
270,285

Supplemental disclosures

 

Cash payments for income taxes
$
60

 
$
247

Cash payments for interest expense
$
32,617

 
$
22,607

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

 
$

Liabilities assumed
352,570

 

Less: Noncontrolling interests
11,113

 

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

 
$

Schedule of non-cash activities


 


Change in property, plant and equipment
$
122,161

 
$
956

Accrual of dividends
$
45

 
$

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 7.5% 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 purchased principally from, Pattern Development 1.0, except for purchases of Lost Creek, Post Rock and certain additional interests in El Arrayán (each as defined below) which were purchased from third-parties. Each of the Company's wind and solar projects and certain assets are 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), and Broadview Finco Pledgor LLC ((Broadview Project) (which consists primarily of Broadview Energy KW, LLC and Broadview Energy JN, LLC (together, Broadview) and Western Interconnect LLC, a transmission line (Western Interconnect)));
Pattern Canada Operations Holdings ULC (which consists primarily of 100% ownership of St. Joseph Windfarm Inc. (St. Joseph), a consolidated controlling interest in Meikle Wind Energy Limited Partnership (Meikle) and noncontrolling interests in South Kent Wind LP (South Kent), Grand Renewable Wind LP (Grand), K2 Wind Ontario Limited Partnership (K2), and SP Armow Wind Ontario LP (Armow) which are accounted for as unconsolidated investments);
Pattern Chile Holdings LLC (which includes a controlling interest in Parque Eólico El Arrayán SpA (El Arrayán) and a controlling interest in Don Goyo Transmisi ó n S.A. (Don Goyo), a transmission asset of El Arrayán); and
Green Power Tsugaru Holdings G.K. (Tsugaru Holdings) (which consists primarily of 100% ownership of Green Power Tsugaru G.K. (Tsugaru)) and Green Power Generation G.K. (which consists primarily of 100% ownership in GK Green Power Otsuki (Ohorayama), Otsuki Wind Power Corporation (Otsuki), and GK Green Power Kanagi (Kanagi), and consolidated controlling interest in GK Green Power Futtsu (Futtsu)).
In February 2018, the Company funded $35.2 million into Pattern Development 2.0 of which approximately $27 million was used by Pattern Development 2.0 to fund the purchase of Green Power Investments (GPI). As of March 31, 2018 , the Company has funded $102.5 million in aggregate and holds an approximately 23% ownership interest in Pattern Development 2.0.
2.      Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the results of wholly-owned and partially-owned subsidiaries in which the Company has a controlling interest with all significant intercompany accounts and transactions eliminated in consolidation.

11


Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the interim financial information reflects all adjustments of a normal recurring nature, necessary for a fair presentation of the Company’s financial position at March 31, 2018 , the results of operations and comprehensive income (loss) for the three months ended March 31, 2018 and 2017 , respectively, and the cash flows for the three months ended March 31, 2018 and 2017 , respectively. The consolidated balance sheet at December 31, 2017 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. This Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 .
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates, and such differences may be material to the financial statements.
Reclassification
Certain prior period balances have been reclassified to conform to the current period presentation in the Company’s consolidated financial statements and the accompanying notes.
Reconciliation of Cash and Cash Equivalents and Restricted Cash as Presented on the Statements of Cash Flows
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands):
 
 
March 31,
2018
 
March 31,
2017
Cash and cash equivalents
 
$
162,144

 
$
244,675

Restricted cash - current
 
8,698

 
8,493

Restricted cash
 
9,524

 
17,117

Cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
 
$
180,366

 
$
270,285

Major Equipment Advances
Major equipment advances represent amounts advanced to suppliers for the manufacture of wind turbines, transmission lines, and solar panels in accordance with component equipment supply agreements for the Company's projects and for which the Company has not taken title. All major equipment advances are with creditworthy global manufacturers. These advances are reclassified to construction in progress when the Company takes legal title of the equipment.
Goodwill
Goodwill is not amortized, but is subject to an assessment for impairment at least annually or more frequently if events occur or circumstances change that will more likely than not reduce the fair value of the reporting unit below its carrying amount. 
The 2017 Tax Act
On December 22, 2017, the 2017 Tax Act (Tax Act) was enacted, which significantly revises the U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system and imposing a one-time tax on foreign unremitted earnings. The Tax Act also establishes several new tax provisions effective in 2018.

12


On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.
As of December 31, 2017, the Company was able to make a reasonable estimate of the impact of several provisions of the Tax Act, including the repatriation provisions and the Tax Act’s reduction of the U.S. federal tax rate from 35% to 21% which impacts the Company's U.S. deferred tax assets and deferred liabilities. The U.S operations as of December 31, 2017 were in a net deferred tax asset position offset by a full valuation allowance and thus, any adjustments to the deferred accounts did not impact the tax provision.  Although the Company made a reasonable estimate of the amounts related to the repatriation provisions and deferred tax assets and deferred tax liabilities disclosed, a final determination of the Tax Act’s impact on the Company’s tax provision and deferred tax assets and deferred tax liabilities and related valuation allowance requirements remained incomplete as of December 31, 2017 pending a full analysis of the provisions and their interpretations. As of March 31, 2018, the Company has not changed the provisional estimates recognized in 2017, and therefore no impact was reflected in the effective tax rate for the period ended March 31, 2018. Given the complexity of the Tax Act, we are still evaluating the tax impact and obtaining the information, including data from third parties and other items, required to complete the accounting. The date the Company expects to complete the accounting is not currently determinable while it continues to obtain the information required to complete the accounting.
The Tax Act also includes a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries. Entities can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, The Company is still evaluating the tax impact and has not yet made the accounting policy election.
Recently Issued Accounting Standards
Except for the evaluation of recently issued accounting standards set forth below, there have been no changes to the Company's evaluation of other recently issued accounting standards disclosed in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 .
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605) and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective transition method. The adoption did not have material impact on the Company's consolidated financial statements. See Note 3, Revenue for further details.
In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02), which requires lessees to recognize right-of-use assets and lease liabilities, for all leases, with the exception of short-term leases, at the commencement date of each lease. Under the new guidance, lessor accounting is largely unchanged. ASU 2016-02 simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and liabilities. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. The amendments of this update should be applied using a modified retrospective approach, which requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented. The Company is implementing a number of system enhancements to facilitate the identification, tracking and reporting of leases based upon the requirements of the new lease standard. The Company is also assessing the accounting impact of the ASU 2016-02 as it applies to its PPAs, land leases, office leases and equipment leases. As the Company progresses further in its analysis, the scope of this assessment could be expanded to review other types of contracts. The Company is continuing to assess the transition options and practical expedients, and monitoring industry implementation issues. The Company will adopt ASU 2016-02 beginning January 1, 2019.

13


3.      Revenue
On January 1, 2018, the Company adopted the new accounting standard Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers , and all the related amendments (Topic 606) and applied Topic 606 to its power sale agreement (PSA) contracts previously accounted for under Topic 605, using the modified retrospective method. Results of the reporting period beginning January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting under Topic 605.
The Company sells electricity and related renewable energy credits (RECs) under the terms of PSAs or at market prices. Depending on the terms of the PSAs, the Company may account for the contracts as operating leases pursuant to ASC 840, Leases (ASC 840), derivative instruments pursuant to ASC 815, Derivatives and Hedging (ASC 815) or contracts with customers pursuant to Topic 606. A majority of the Company' s revenues are accounted for under ASC 840 or ASC 815.
The Company did not record any adjustment to the opening retained earnings as of January 1, 2018 as a result of adopting Topic 606. Additionally, the adoption of Topic 606 does not materially change the presentation of revenue.
Revenue Recognition
Revenues from contracts with customers are recognized when control of promised goods and services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
The following table presents the Company's total revenue recognized and, for contracts with customers, disaggregated by revenue sources (in thousands).
 
 
Three Months Ended March 31,
 
 
2018
 
2017 (1)
Revenue from contracts with customers
 
 
 
 
Electricity sales under PSA
 
$
20,686

 
$
18,821

Electricity sales to market
 
2,193

 
3,399

REC sales
 
1,947

 
2,282

Total revenue from contracts with customers
 
$
24,826

 
$
24,502

Other electricity sales (2)
 
77,321

 
73,932

Related party other revenue
 
9,512

 
2,399

Total revenue
 
$
111,659

 
$
100,833

(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.
(2) Includes revenue from PSAs accounted for as leases and energy hedge contracts.
Electricity Sales
The Company generates revenues primarily by delivering electricity to customers under PSAs and market participants. The revenues are primarily determined by the price of the electricity under the PSAs or market price multiplied by the amount of electricity that the Company produces.
The Company transfers control of the electricity over time and the customer simultaneously receives and consumes the benefits provided by the Company's performance as it performs. Accordingly, the Company has concluded that the sale of electricity over the term of the agreement represents a series of distinct goods that are substantially the same and that have the same pattern of transfer to the customer. Each distinct transfer of electricity in the series that the Company promises to transfer to the customer meets the criteria to be a performance obligation satisfied over time. The electricity sales are recognized based on an output measure, as each MWh is delivered to the customers. The Company recognizes revenue based on the amount invoiced on the basis of the prices multiplied by MWh delivered. The Company does not determine the total transaction price at contract inception, allocate the transaction price to performance obligations, or disclose the value of remaining performance obligations for contracts for which it recognizes revenue as invoiced.

14


Renewable Energy Credits Sales
Each promise to deliver RECs is a distinct performance obligation that is satisfied at a point in time as none of the criteria are met to account for such promise as performance obligation satisfied over time. The Company delivers RECs with electricity under PSAs and on a standalone basis (in a contract that does not include electricity). When RECs are sold on a standalone basis, the revenue related to the RECs is recognized at the point in time at which control of the energy credits is transferred to customers. RECs delivered under PSAs with electricity are immaterial in the context of the contracts with customers.
Remaining performance obligations represent the transaction price of standalone RECs for which RECs have not been delivered to the customer's account. The transaction price is determined on the basis of the stated contract price multiplied by RECs to be delivered. As of March 31, 2018, approximately $23.7 million of revenue is expected to be recognized from remaining performance obligations associated with the standalone sale of RECs. The Company expects to recognize revenue on approximately half of these remaining performance obligations over the next 24 months, with the balance recognized thereafter.
Contract Balances
The Company did not record any contract assets as none of its right to payment was subject to something other than passage of time. The Company also did not record any contract liabilities as it recognizes revenue only at the amount to which it has the right to invoice for the electricity and RECs delivered; therefore, there are no advanced payments or billings in excess of electricity or RECs delivered.
4.      Acquisitions
Business Combination
Japan Acquisition
On March 7, 2018, pursuant to a series of purchase and sale agreements with Pattern Development 1.0 and GPI, the Company acquired Tsugaru Holdings which owns Tsugaru, a project company currently constructing a 122 MW name plate capacity wind facility in Aomori Prefecture, Japan expected to commence commercial operations in early to mid-2020; Ohorayama, a wind project located in Kochi Prefecture, Japan, with a name plate capacity of 33 MW that commenced commercial operations in March 2018; Kanagi, a solar project located in Shimane Prefecture, Japan, with a name plate capacity of 10 MW that commenced commercial operations in 2016; Otsuki, a wind project located in Kochi Prefecture, Japan, with a name plate capacity of 12 MW that commenced commercial operations in 2006; and Futtsu, a solar project located in Chiba Prefecture, Japan, with a name plate capacity of 29 MW that commenced commercial operations in 2016, collectively referred to as the Japan Acquisition. The acquisition is in alignment with the Company's growth strategy to expand its portfolio of power generating projects.
Total consideration for the Japan Acquisition was $282.5 million , which consisted of approximately $ 176.6 million of cash and post-closing contingent payments with fair value of approximately $105.9 million . As part of the acquisition, the Company also assumed $181.3 million of debt. The Company incurred transaction-related expenses of $ 1.3 million which were recorded in net loss on transactions in the consolidated statements of operations for the three months ended March 31, 2018.
The identifiable assets, operating contracts and liabilities assumed for the Japan Acquisition were recorded at their fair values, which corresponded to the sum of the cash purchase price, contingent consideration payment, and the fair value of the other investor's noncontrolling interests.

15


The following table details the total consideration paid by the Company and the fair value of the assets acquired and liabilities assumed (in thousands):


March 7, 2018
Consideration paid:
 
$
282,548

Identifiable assets acquired:
 

Cash and cash equivalents (1)

$
10,100

Restricted cash, current (1)

8,325

Trade receivables (1)

3,005

Prepaid expenses (1)

2,207

Other current assets (1)

8,368

Major equipment advances (1)

1,240

Restricted cash, noncurrent (1)

565

Deferred financing costs, net (1)

1,337

Property, plant and equipment

262,681

Construction in progress

181,549

Land (1)

112

Goodwill

60,302

Finite lived intangible assets

103,170

Other noncurrent assets (1)

3,270

Identifiable liabilities assumed:
 

Accounts payable and other accrued liabilities (1)

(6,607
)
Accrued interest (1)

(474
)
Accrued construction costs (1)

(4,128
)
Contingent liabilities, current

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

(7,511
)
Other current liabilities (1)

(22,094
)
Long-term debt

(173,828
)
Deferred tax liabilities

(67,179
)
Asset retirement obligations

(39,872
)
Finite lived intangible liability

(9,252
)
Derivative liabilities

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

293,661

Less: noncontrolling interests

(11,113
)
Total consideration

$
282,548

(1) Amounts recorded at carrying value which was representative of the fair value on the date of acquisition.
Property, plant and equipment, construction in progress, and finite-lived intangible assets were recorded at fair value estimated using the cost and income approach. The fair value of asset retirement obligations, long-term debt, finite lived intangible liability and derivative liabilities were recorded at fair value using a combination of market data, operational data and discounted cash flows and were adjusted by a discount rate factor reflecting current market conditions at the time of acquisition. The noncontrolling interest in Futtsu was recorded at fair value estimated using a projected cash flow stream of distributable cash, discounted to present value with a discount rate reflecting the cost of equity adjusted for control premium.
Certain deferred tax liabilities were carried over to the Company as a result of the Japan Acquisition based on the Company's ability to utilize them in the future. Additionally, deferred tax liabilities and goodwill were established for acquisition accounting fair value adjustments as the future accretion of the fair value adjustments represent temporary differences between book income and taxable income.

16


The Company assumed a $16.2 million contingent liability as part of the acquisition. This contingent payment is subject to the completion of a construction milestone at Tsugaru and is calculated based on the nameplate capacity of Tsugaru.
The contingent purchase consideration with fair value of $102.9 million , subject to foreign currency exchange rate changes, is contingent upon term conversion of the Tsugaru construction loan and to the extent such term conversion does not occur such consideration will be made upon the commencement of commercial operations of Tsugaru, both of which are expected to occur in 2020. The remaining contingent purchase consideration of $ 3.0 million , subject to foreign currency exchange rate changes, is contingent upon term conversion of the Ohorayama construction loan, expected to occur in mid-2018. See Note 13, Fair Value Measurements for further discussion in the fair value of the contingent consideration.
The accounting for this acquisition is preliminary. The fair value estimates for the assets acquired and liabilities assumed 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)
Ohorayama commenced operations in March 2018 and until approximately one week before acquisition, Ohorayama was still under construction. In addition, Tsugaru is expected to commence commercial operations in early to mid-2020. Therefore, pro forma data for Ohorayama and Tsugaru have not been provided as there is no material difference between pro forma data that give effects to the Japan Acquisition as if it had occurred on January 1, 2017 and the actual data reported for the three months ended March 31, 2018 and 2017.
The unaudited pro forma statement of operations data below gives effect to the Japan Acquisition, as if it had occurred on January 1, 2017. The 2018 pro forma net loss was adjusted to exclude nonrecurring transaction related expenses of $ 1.3 million . The unaudited pro forma data is presented for illustrative purposes only and is not intended to be indicative of actual results that would have been achieved had the acquisition been consummated as of January 1, 2017. The unaudited pro forma data should not be considered representative of the Company’s future financial condition or results of operations.
Unaudited pro forma data (in thousands)
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
Pro forma total revenue
 
$
115,394

 
$
107,043

Pro forma total expenses
 
(127,354
)
 
(104,840
)
Pro forma net (loss) income
 
(11,960
)
 
2,203

Less: pro forma net loss attributable to noncontrolling interest
 
(148,336
)
 
(3,042
)
Pro forma net income attributable to Pattern Energy
 
$
136,376

 
$
5,245

The following table presents the amounts included in the consolidated statements of operations for the acquisition discussed above since the date of the acquisition:
Unaudited data (in thousands)
 
Three Months Ended March 31, 2018
Total revenue
 
$
4,040

Total expenses
 
(3,055
)
Net income
 
985

Less: net income attributable to noncontrolling interest
 
179

Net income attributable to Pattern Energy
 
$
806


17


5.      Property, Plant and Equipment
The following presents the categories within property, plant and equipment (in thousands):
 
March 31,
 
December 31,
 
2018
 
2017
Operating wind farms
$
4,885,871

 
$
4,640,718

Transmission line
93,849

 
93,849

Construction in progress
182,123

 

Furniture, fixtures and equipment
12,882

 
12,643

Land
253

 
141

Subtotal
5,174,978

 
4,747,351

Less: accumulated depreciation
(834,005
)
 
(782,230
)
Property, plant and equipment, net
$
4,340,973

 
$
3,965,121

The Company recorded depreciation expense related to property, plant and equipment of $54.3 million and $43.0 million for the three months ended March 31, 2018 and 2017, respectively.
6.      Finite-Lived Intangible Assets and Liabilities and Goodwill
Finite-Lived Intangible Assets and Liabilities
The following presents the major components of the finite-lived intangible assets and liabilities (in thousands):
 
 
March 31, 2018
 
 
Weighted Average Remaining Life
 
Gross
 
Accumulated Amortization
 
Net
Intangible assets
 
 
 
 
 
 
 
 
Power purchase agreements
 
16
 
$
229,502

 
$
(19,848
)
 
$
209,654

Industrial revenue bond tax savings
 
24
 
12,778

 
(479
)
 
12,299

Other intangible assets
 
34
 
15,234

 
(1,235
)
 
13,999

Total intangible assets
 
 
 
$
257,514

 
$
(21,562
)
 
$
235,952

Intangible liabilities
 
 
 
 
 
 
 
 
Power purchase agreement
 
15
 
$
60,300

 
$
(9,973
)
 
$
50,327

Leasehold interest
 
23
 
9,252

 

 
9,252

Total intangible liabilities
 
 
 
$
69,552

 
$
(9,973
)
 
$
59,579


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

 
$
(17,611
)
 
$
109,473

Industrial revenue bond tax savings
 
24
 
12,778

 
(351
)
 
12,427

Other intangible assets
 
34
 
15,234

 
(1,086
)
 
14,148

Total intangible assets
 
 
 
$
155,096

 
$
(19,048
)
 
$
136,048

Intangible liability
 
 
 
 
 
 
 
 
Power purchase agreement
 
15
 
$
60,300

 
$
(9,106
)
 
$
51,194


18


The Company presents amortization of the PPA assets and PPA liabilities as an offset to electricity sales in the consolidated statements of operations, which resulted in net expense of $1.4 million and $0.7 million for the three months ended March 31, 2018 and 2017 , respectively. For other intangible assets, the Company includes the amortization in depreciation, amortization and accretion in the consolidated statements of operations and recorded amortization expense of $0.1 million and $0.1 million for the three months ended March 31, 2018 and 2017 , respectively.
As part of the 2017 Broadview acquisition, the Company acquired an intangible asset related to future property tax savings resulting from the issuance of industrial revenue bonds during construction of the project. The intangible asset is being amortized to depreciation, amortization and accretion in the consolidated statements of operations. The Company recorded amortization expense of $0.1 million for the three months ended March 31, 2018 related to the industrial revenue bond tax savings intangible asset. The Company did not record any amortization expense for the three months ended March 31, 2017 as the Broadview Project was acquired in May 2017.
As a result of the Japan Acquisition, the Company recorded $103.2 million of intangible PPA assets resulting from market prices that are lower than the contractual prices. In addition, the Company recorded a $9.3 million intangible leasehold interest liability, as a result of higher market prices compared to the contractual prices, which is being amortized to depreciation, amortization and accretion in the consolidated statements of operations.
The following table presents estimated future amortization for the next five years related to the Company's finite-lived intangible assets and liabilities (in thousands):
Year ended December 31,
 
Power purchase agreements, net
 
Industrial revenue bond tax savings
 
Other intangible assets
 
Leasehold interests
2018 (remainder)
 
$
7,597

 
$
385

 
$
454

 
$
(303
)
2019
 
10,011

 
513

 
605

 
(404
)
2020
 
10,049

 
513

 
605

 
(404
)
2021
 
10,011

 
513

 
605

 
(404
)
2022
 
10,011

 
513

 
605

 
(404
)
Thereafter
 
111,648

 
9,862

 
11,125

 
(7,333
)
Goodwill
In connection with the Japan Acquisition, deferred tax liabilities were established for acquisition accounting fair value adjustments as the future accretion of the fair value adjustments represents temporary differences between book income and taxable income. These fair value adjustments resulted in goodwill of $60.3 million being recorded.
7.      Variable Interest Entities
The Company consolidates variable interest entities (VIEs) in which it holds a variable interest and is the primary beneficiary. The Company has determined that Logan's Gap, Panhandle 1, Panhandle 2, Post Rock, Amazon Wind and Broadview Energy Holdings LLC (a subsidiary of Broadview Project) are VIEs. The Company determined that as the managing member of the VIEs, it is the primary beneficiary by reference to the power and benefits criterion under ASC 810, Consolidation , and therefore, consolidates VIEs. The Company considered responsibilities within the contractual agreements, which grant it the power to direct the activities of the VIE that most significantly impact the VIE's economic performance. Such activities include management of the wind farms' operations and maintenance, budgeting, policies and procedures. In addition, the Company has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs on the basis of the income allocations and cash distributions.
The Company’s equity method investment in Pattern Development 2.0 is considered to be a VIE primarily because the total equity at risk is not sufficient to permit Pattern Development 2.0 to finance its activities without additional subordinated financial support by the equity holders. The Company does not hold the power or benefits to be the primary beneficiary and does not consolidate the VIE. The carrying value of its unconsolidated investment in Pattern Development 2.0 was $93 million as of March 31, 2018 . The Company's maximum exposure to loss is equal to the carrying value of the investment.

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.
 
March 31,
2018
 
December 31,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
20,421

 
$
33,273

Restricted cash
4,324

 
4,314

Trade receivables
18,829

 
12,769

Prepaid expenses
5,499

 
4,965

Other current assets
1,703

 
2,597

Total current assets
50,776

 
57,918

 
 
 
 
Restricted cash
614

 
3,330

Property, plant and equipment, net
1,959,617

 
1,984,606

Finite-lived intangible assets, net
12,056

 
12,210

Other assets
13,051

 
12,984

Total assets
$
2,036,114

 
$
2,071,048

 
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued liabilities
$
14,135

 
26,826

Accrued construction costs
13

 
759

Accrued interest
76

 
78

Other current liabilities
4,691

 
4,789

Total current liabilities
18,915

 
32,452

 
 
 
 
Finite-lived intangible liability, net
50,327

 

Contingent liabilities

 
87

Other long-term liabilities
52,123

 
47,345

Total liabilities
$
121,365

 
$
79,884



20


8.      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,
 
2018
 
2017
 
2018
 
2017
South Kent
$
12,732

 
$
6,151

 
50.0
%
 
50.0
%
Grand
9,213

 
6,611

 
45.0
%
 
45.0
%
K2
98,219

 
103,328

 
33.3
%
 
33.3
%
Armow
134,678

 
132,890

 
50.0
%
 
50.0
%
Pattern Development 2.0
92,989


62,243

 
23.2
%

20.9
%
Unconsolidated investments
$
347,831

 
$
311,223

 
 
 
 
Pattern Development 2.0
In February 2018, the Company funded $35.2 million into Pattern Development 2.0 of which approximately $27 million was used by Pattern Development 2.0 to fund the purchase of GPI. As of March 31, 2018 , the Company has funded $102.5 million in aggregate and holds an approximately 23% ownership interest in Pattern Development 2.0.
Basis Amortization of Unconsolidated Investments
The cost of the Company’s investment in the net assets of unconsolidated investments was higher than the fair value of the Company’s equity interest in the underlying net assets of its unconsolidated investments. The basis differences were primarily attributable to property, plant and equipment, PPAs, and equity method goodwill. The Company amortizes the basis difference attributable to property, plant and equipment, and PPAs over their useful life and contractual life, respectively. The Company does not amortize equity method goodwill. For the three months ended March 31, 2018 and 2017, the Company recorded basis difference amortization for its unconsolidated investments of $2.7 million and $2.8 million , respectively, in earnings in unconsolidated investments, net on the consolidated statements of operations.
Significant Equity Method Investees
The following table presents summarized statements of operations information for the three months ended March 31, 2018 and 2017 as required for the Company's significant equity method investees, South Kent, Grand, K2, Armow and Pattern Development 2.0 pursuant to Regulation S-X Rule 10-01(b)(1) (in thousands):
 
Three months ended March 31,
 
2018
 
2017 (1)
Revenue
$
109,533

 
$
100,359

Cost of revenue
30,337

 
29,589

Operating expenses
19,154

 
714

Other expense
20,851

 
22,841

Net income
$
39,191

 
$
47,215

(1)  
Results for the three months ended March 31, 2017 do not include Pattern Development 2.0, which the Company invested in during July 2017.


21


9.      Debt
The Company’s debt consists of the following for periods presented below (in thousands):
 
 
 
 
 
As of March 31, 2018
 
March 31, 2018
 
December 31, 2017
 
Contractual Interest Rate
 
Effective Interest Rate
 
 
 
 
 
 
 
Maturity
Corporate-level
 
 
 
 
 
 
 
 
 
Revolving Credit Facility
$
248,000

 
$

 
varies

(1)  
3.31
%
(1)  

2020 Notes
225,000

 
225,000

 
4.00
%
 
6.60
%
 
July 2020
2024 Notes
350,000

 
350,000

 
5.88
%
 
5.88
%
 
February 2024
Project-level
 
 
 
 
 
 
 
 
 
Fixed interest rate
 
 
 
 
 
 
 
 
 
El Arrayán EKF term loan
96,974

 
99,112

 
5.56
%
 
5.56
%
 
March 2029
Santa Isabel term loan
102,840

 
103,878

 
4.57
%
 
4.57
%
 
September 2033
Variable interest rate
 
 
 
 
 
 
 
 
 
Ocotillo commercial term loan
289,201

 
289,339

 
3.81
%
 
4.06
%
(3)  
June 2033
El Arrayán commercial term loan
88,158

 
90,102

 
4.25
%
 
5.75
%
(3)  
 March 2029
Spring Valley term loan
123,660

 
125,678

 
4.06
%
 
5.03
%
(3)  
 June 2030
St. Joseph term loan (2)
165,699

 
171,487

 
3.36
%
 
3.93
%
(3)  
 November 2033
Western Interconnect term loan (2)
53,507

 
54,395

 
4.31
%
 
4.33
%
(3)  
April 2027
Meikle term loan (2)
255,746

 
266,557

 
3.23
%
 
3.92
%
(3)  
May 2024
Futtsu term loan
81,064

 

 
1.07
%
 
1.85
%
 
December 2033
Ohorayama term loan
94,857

 

 
0.87
%
 
0.87
%
 
February 2036
Tsugaru construction loan
50,862

 

 
0.72
%
 
0.72
%
 
March 2038
Tsugaru Holdings loan
60,912

 

 
3.09
%
 
3.09
%
 
July 2022
Imputed interest rate
 
 
 
 
 
 
 
 
 
Hatchet Ridge financing lease obligation
192,079

 
192,079

 
1.43
%
 
1.43
%
 
December 2032
 
2,478,559

 
1,967,627

 
 
 
 
 
 
Unamortized premium/discount, net  (4)
(12,243
)
 
(13,470
)
 
 
 
 
 
 
Unamortized financing costs
(29,062
)
 
(23,426
)
 
 
 
 
 
 
Total debt, net
$
2,437,254

 
1,930,731

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As reflected on the consolidated balance sheets
 
 
 
 
 
 
 
 
 
Revolving Credit Facility
$
248,000

 
$

 
 
 
 
 
 
Current portion of long-term debt, net of financing costs
61,191

 
51,996

 
 
 
 
 
 
Long term debt, net of financing costs
2,128,063

 
1,878,735

 
 
 
 
 
 
Total debt, net
$
2,437,254

 
$
1,930,731

 
 
 
 
 
 
(1)  
Refer to Revolving Credit Facility for interest rate details.
(2)  
The amortization for the St. Joseph term loan, the Western Interconnect term loan and the Meikle term loan are through 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 11 , Derivative Instruments , for discussion of interest rate swaps.
(4)  
The discount relates to the 2020 Notes.

22


Interest and commitment fees incurred and interest expense for debt consisted of the following (in thousands):
 
Three months ended March 31,
 
 
2018
 
2017
 
Corporate-level interest and commitment fees incurred
$
8,665

 
$
7,115

 
Project-level interest and commitment fees incurred
14,192

 
12,361

 
Amortization of debt discount/premium, net
1,227

 
1,102

 
Amortization of financing costs
1,249

 
1,858

 
Other interest
111

 
119

 
Interest expense
$
25,444

 
$
22,555

 
Corporate Level Debt
Revolving Credit Facility
Certain of the Company's subsidiaries have entered into a Second Amended and Restated Credit and Guaranty Agreement to the Revolving Credit Facility (the Revolving Credit Facility). The Revolving Credit Facility provides for a revolving credit facility of $440 million . The facility has a five -year term and is comprised of a revolving loan facility, a letter of credit facility and a swingline facility. The facility is secured by pledges of the capital stock and ownership interests in certain of the Company's holding company subsidiaries, in addition to other customary collateral.
As of March 31, 2018 , $153.3 million was available for borrowing under the $440 million Revolving Credit Facility. 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, 2018 , the Company's holding company subsidiaries were in compliance with covenants contained in the Revolving Credit Facility.
As of March 31, 2018 and December 31, 2017 , letters of credit of $38.7 million and $47.5 million , respectively, were issued under the Revolving Credit Facility.     
2020 Notes
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 following table presents a summary of the equity and liability components of the 2020 Notes (in thousands):
 
March 31,
2018
 
December 31,
2017
Principal
$
225,000

 
$
225,000

Less:

 

Unamortized debt discount
(12,243
)
 
(13,470
)
Unamortized financing costs
(2,523
)
 
(2,794
)
Carrying value of convertible senior notes
$
210,234

 
$
208,736

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.

23


Project Debt
Tsugaru Credit Facility
In March 2018, Tsugaru entered into a credit agreement for a Construction Facility, a Term Facility, a Letter of Credit Facility (the LC Facility) and a Japanese Consumption Tax Facility (the JCT Facility). Under the Construction Facility, the Company may borrow up to $371.4 million to fund the construction of Tsugaru which automatically converts to a Term Facility upon the earlier of completion of construction of the project (expected to be March 2020) or September 2020 (the Term Conversion Date). The credit agreement, including the Term Facility and LC Facility, mature 18 years following the Term Conversion Date, not later than March 2039. The interest rate on the Construction Facility and Term Facility is the Tokyo Interbank Offered Rate (TIBOR) plus 0.65% . The LC Facility establishes a $19.7 million debt service reserve account letter of credit and an $8.0 million operations and maintenance reserve account letter of credit with amounts outstanding under the letters of credit owing interest at a rate of 1.10% and fees on the undrawn amounts of 0.30% . The JCT Facility provides for up to $33.8 million to pay Japanese consumption taxes arising from payment of project costs, with an interest rate of TIBOR plus 0.30% and a maturity date corresponding to the Term Conversion Date. The Company owes a commitment fee of 0.30% on any available amounts under the Construction Facility and the JCT Facility and on any undrawn amounts on the letters of credit up to the Term Conversion Date. Collateral for the credit facility includes Tsugaru's tangible assets and contractual rights and cash on deposit with the depository agent. The credit agreement contains a broad range of covenants that, subject to certain exceptions, restrict Tsugaru's ability to incur debt, grant liens, sell or lease certain assets, transfer equity interests, dissolve, make distributions or change its business. As of March 31, 2018, outstanding borrowings under the Construction Facility totaled $50.9 million .
Tsugaru Holdings Loan Agreement

In March 2018, Tsugaru Holdings entered into a loan agreement (Loan Agreement) that provides for borrowings of up to $70.1 million during the Tsugaru construction period, until no later than September 2020. The interest rate on outstanding borrowings under the Loan Agreement is TIBOR plus 3.0% with principal due July 2022 and a commitment fee of 0.50% on the unused portion of the facility. The Loan Agreement is subject to certain covenants and is secured by the membership interests and other rights. As of March 31, 2018, outstanding borrowings under the Loan Agreement totaled $60.9 million .
10.      Asset Retirement Obligation
The Company's asset retirement obligations represent the estimated cost of decommissioning the turbines, removing above-ground installations and restoring the sites at the end of its estimated economic useful life.
The following table presents a reconciliation of the beginning and ending aggregate carrying amounts of asset retirement obligation (in thousands):
 
 
Three months ended March 31,
 
 
2018
 
2017
Beginning asset retirement obligations
 
$
56,619

 
$
44,783

Net additions during the period (1)
 
39,872

 

Foreign currency translation adjustment
 
(179
)
 
22

Accretion expense
 
896

 
640

Ending asset retirement obligations
 
$
97,208

 
$
45,445

(1)         Reflects additions due to the Japan Acquisition. See Note 4 , Acquisitions , for discussion of the acquisition.

24


11.      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, Japan 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, 2018 , the Company had other energy-related contracts that did not meet the definition of a derivative instrument or qualified for the normal purchase normal sale scope exception and were therefore exempt from fair value accounting treatment.
The following tables present the fair values of the Company's derivative instruments on a gross basis as reflected on the Company’s consolidated balance sheets (in thousands):
 
 
March 31, 2018
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Current
 
Long-Term
 
Current
 
Long-Term
Fair Value of Designated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
66

 
$
7,458

 
$
4,221

 
$
22,966

 
 
 
 
 
 
 
 
 
Fair Value of Undesignated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 

 

 
465

 
1,207

Energy derivative
 
13,791

 
2,033

 

 

Foreign currency forward contracts
 
1,890

 
4,288

 
999

 
4,252

Total Fair Value
 
$
15,747

 
$
13,779

 
$
5,685

 
$
28,425

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

 
$
1,968

 
$
4,397

 
$
17,961

 
 
 
 
 
 
 
 
 
Fair Value of Undesignated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
228

 
$
858

 
$
2,542

Energy derivative
 
19,440

 
7,432