Document


 
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, 2019.
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.)
1088 Sansome Street, 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 every Interactive Data File required to be submitted 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 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  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol
 
Name of each exchange on which registered
Class A common stock
 
PEGI
 
Nasdaq Global Select Market
 
 
 
 
Toronto Stock Exchange
As of May 6, 2019, there were 98,251,118 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, 2019
TABLE OF CONTENTS
 
 
PART I. FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
Item 1A.
Item 2.
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 electricity generation, our projections thereof and factors affecting production, including wind, solar and other conditions, other weather conditions, availability and curtailment;
our ability to manage exposure to project development risks;
our ability to complete acquisitions and dispositions of power projects;
our ability to complete construction of 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);
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 and the discontinuation of LIBOR;
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 power projects in development, 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 power projects;
the value of collateral in the event of liquidation; and

3


other factors discussed under “Risk Factors.”
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, 2018.
Readers are cautioned to not 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


MEANING OF CERTAIN REFERENCES
Unless the context provides otherwise, references herein to “we,” “our,” “us,” “our company” and “Pattern” refer to Pattern Energy Group Inc., a Delaware corporation, together with its consolidated subsidiaries. In addition, unless the context requires otherwise, any reference in this Form 10-Q to:
“Amazon Wind” refers to Fowler Ridge IV Wind Farm LLC, a wind project located in Benton County, Indiana;
“Armow” refers to SP Armow Wind Ontario LP, a wind project located in Kincardine, Ontario, Canada;
“Broadview” collectively refers to Broadview Finco Pledgor LLC (Broadview Project), consisting of Broadview Energy KW, LLC and Broadview Energy JN, LLC, a wind project located in Curry County, New Mexico, and Western Interconnect;
“El Arrayán” refers to Parque Eólico El Arrayán SpA, a wind farm located in Ovalle, Chile (we disposed of our interests in El Arrayán on August 20, 2018);
“ERCOT” refers to the Electric Reliability Council of Texas;
“Futtsu” refers to GK Green Power Futtsu, a solar project located in Chiba Prefecture, Japan;
“GPG” refers to Green Power Generation GK which consists primarily of 100% ownership in Ohorayama, Otsuki and Kanagi, and a consolidated controlling interest in Futtsu;
“GPI” refers to Green Power Investment Corporation;
"Grady" refers to Grady Wind Energy Center, LLC, a wind project located in Curry County, New Mexico;
“Grand” refers to Grand Renewable Wind LP, a wind project located in Haldimand County, Ontario, Canada;
“Gulf Wind” refers to Pattern Gulf Wind LLC, a wind project located in Kenedy County, Texas;
“Hatchet Ridge” refers to Hatchet Ridge Wind, LLC, a wind project located in Shasta County, California;
“Identified ROFO Projects” refers to projects that we have identified as development projects, owned by either of the Pattern Development Companies and subject to our Project Purchase Rights. See Identified ROFO Projects list in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations;
“IPPs” refers to independent power producers;
“ISOs” refers to independent system organizations, which are organizations that administer wholesale electricity markets;
“ITCs” refers to investment tax credits;
“K2” refers to K2 Wind Ontario Limited Partnership, a wind project located in Ashfield-Colborne-Wawanosh, Ontario, Canada (we disposed of our interests in K2 on December 31, 2018);
“Kanagi” refers to GK Green Power Kanagi, a solar wind project located in Shimane Prefecture, Japan;
“kWh” refers to kilowatt hour;
“Logan's Gap” refers to Logan's Gap Wind LLC, a wind project located Comanche County, Texas;
“Lost Creek” refers to Lost Creek Wind, LLC, a wind project located in DeKalb County, Missouri;
“Meikle” refers to Meikle Wind Energy L.P., a wind project located in Peace Region, British Columbia, Canada;
“MSM” refers to Mont Sainte-Marguerite Wind Farm Limited Partnership, a wind project located in Chaudiére-Appalaches, Quebec, Canada;
“Multilateral Management Services Agreement” (MSA) refers to the amended and restated multilateral services agreement between us and each of the Pattern Development Companies;
“MW” refers to megawatts;
“MWh” refers to megawatt hours;
“Non-Competition Agreement” refers to the second amended and restated non-competition agreement between us and each of the Pattern Development Companies in which we and each of the Pattern Development Companies have agreed to various arrangements with respect to how we may and may not compete with each other;

5


“Ocotillo” refers to Ocotillo Express LLC, a wind project located in Imperial County, California;
“Ohorayama” refers to GK Green Power Otsuki, a wind project located in Kochi Prefecture, Japan;
“Otsuki” refers to GK Otsuki Wind Power (formerly known as Otsuki Wind Power Corporation), a wind project located in Kochi Prefecture, Japan;
“Panhandle 1” refers to Pattern Panhandle Wind LLC, a wind project located in Carson County, Texas;
“Panhandle 2” refers to Pattern Panhandle Wind 2 LLC, a wind project located in Carson County, Texas;
“Pattern Canada Operations Holdings ULC” consists primarily of 100% ownership of St. Joseph, a consolidated controlling interest in Meikle and MSM, and a noncontrolling interest in Armow, Grand, K2 (which we disposed of on December 31, 2018) and South Kent, each of which are accounted for as unconsolidated investments;
“Pattern Development” refers to Pattern Energy Group 2 LP, a Delaware limited partnership, and, where the context so requires, its subsidiaries. We hold an approximate 29% ownership interest in Pattern Development;
“Pattern Development Companies” refers collectively to Pattern Energy Group LP and Pattern Development and their respective subsidiaries;
“Pattern Development Companies Purchase Rights” refer collectively to our right to acquire Pattern Energy Group LP or substantially all of its assets, as contemplated by the Amended and Restated Purchase Rights Agreement between us and Pattern Energy Group LP (Pattern Energy Group LP Purchase Right) and to our right to acquire Pattern Development or substantially all of its assets, as contemplated by the Amended and Restated Purchase Rights Agreement between us and Pattern Development (Pattern Development Purchase Right);
“Pattern Energy Group LP” refers to Pattern Energy Group LP, a Delaware limited partnership, and, where the context so requires, its subsidiaries;
“Pattern US Operations Holdings LLC” consists primarily of 100% ownership interest of Gulf Wind, Hatchet Ridge, Lost Creek, Ocotillo, Santa Isabel and Spring Valley, and a consolidated controlling interest in Amazon Wind, Broadview, Logan's Gap, Panhandle 1, Panhandle 2, Post Rock, Stillwater and Western Interconnect;
“Post Rock” refers to Post Rock Wind Power Project, LLC, a wind project located in Ellsworth and Lincoln counties, Kansas;
“PPAs” refer to power purchase agreements;
“Project Purchase Rights” refers collectively to our right of first offer with respect to power projects that Pattern Energy Group LP decides to sell, as contemplated by the Amended and Restated Purchase Rights Agreement between us and Pattern Energy Group LP, and our right of first offer with respect to power projects that Pattern Development decides to sell, as contemplated by the Amended and Restated Purchase Rights Agreement between us and Pattern Development (in each case including any Identified ROFO Projects);
“PSAs” or “power sale agreements” refer to PPAs and/or hedging arrangements, as applicable;
“PSP Investments” refers to the Public Sector Pension Investment Board;
“Purchase Rights” refers collectively to the Project Purchase Rights, and the Pattern Development Companies Purchase Rights, as contemplated by the Amended and Restated Purchase Rights Agreement between us and Pattern Energy Group LP and the Amended and Restated Purchase Rights Agreement between us and Pattern Development;
“RECs” refers to renewable energy credits;
“Riverstone” refers to Riverstone Holdings LLC;
“ROFO” refers to right of first offer;
“RPS” refers to Renewable Portfolio Standards;
“Santa Isabel” refers to Pattern Santa Isabel LLC, a wind project located in Santa Isabel, Puerto Rico;
“Sarbanes-Oxley Act” refers to the Sarbanes-Oxley Act of 2002;
“South Kent” refers to South Kent Wind LP, a wind project located in Chatham-Kent, Ontario, Canada;
“Spring Valley” refers to Spring Valley Wind LLC, a wind project located in White Pine County, Nevada;
“St. Joseph” refers to St. Joseph Windfarm Inc., a wind project located in Montcalm, Manitoba, Canada;

6


“Stillwater” refers to Stillwater Wind, LLC, a wind project located in Stillwater County, Montana;
“Tsugaru” refers to Green Power Tsugaru GK, a wind project located in Aomori Prefecture, Japan;
“Tsugaru Holdings” refers to Green Power Tsugaru Holdings GK, which consists primarily of 100% ownership of Tsugaru; and
“Western Interconnect” refers to Western Interconnect LLC, a transmission line located in Curry County, New Mexico.


7


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

2019
 
2018
Assets

 

Current assets:

 

Cash and cash equivalents (Note 6)
$
93

 
$
101

Restricted cash (Note 6)

 
4

Counterparty collateral
6

 
6

Trade receivables (Note 6)
74

 
50

Derivative assets, current
7

 
14

Prepaid expenses (Note 6)
13

 
18

Deferred financing costs, current, net of accumulated amortization of $3 and $3 as of March 31, 2019 and December 31, 2018, respectively
2

 
2

Other current assets (Note 6)
27

 
16

Total current assets
222

 
211

Restricted cash (Note 6)
15

 
18

Major construction advances
86

 
84

Construction in progress
277

 
259

Property, plant and equipment, net (Note 6)
4,052

 
4,119

Unconsolidated investments
257

 
270

Derivative assets
7

 
9

Deferred financing costs
8

 
8

Net deferred tax assets
7

 
5

Intangible assets, net (Note 6)
215

 
219

Goodwill
58

 
58

Other assets (Note 6)
108

 
34

Total assets
$
5,312

 
$
5,294

 
 
 
 
Liabilities and equity

 

Current liabilities:

 

Accounts payable and other accrued liabilities (Note 6)
$
83

 
$
67

Accrued construction costs (Note 6)
13

 
27

Counterparty collateral liability
6

 
6

Accrued interest (Note 6)
7

 
14

Dividends payable
42

 
42

Derivative liabilities, current
3

 
2

Revolving credit facility, current
234

 
198

Current portion of long-term debt, net
59

 
56

Asset retirement obligation, current
24

 
24

Contingent liabilities, current
7

 
31

Other current liabilities (Note 6)
23

 
11

Total current liabilities
501

 
478

Revolving credit facility
24

 
25

Long-term debt, net
2,045

 
2,004

Derivative liabilities
45

 
31

Net deferred tax liabilities
118

 
117

Intangible liabilities, net (Note 6)
47

 
56

Contingent liabilities (Note 6)
142

 
142

Asset retirement obligations (Note 6)
187

 
185

Other long-term liabilities (Note 6)
132

 
71

Contract liability
27

 
26

Total liabilities
3,268

 
3,135

Commitments and contingencies (Note 15)


 


Equity:

 

Class A common stock, $0.01 par value per share: 500,000,000 shares authorized; 98,251,544 and 98,051,629 shares outstanding as of March 31, 2019 and December 31, 2018, respectively
1

 
1

Additional paid-in capital
1,090

 
1,130

Accumulated loss
(57
)
 
(27
)
Accumulated other comprehensive loss
(73
)
 
(52
)
Treasury stock, at cost; 247,995 and 223,040 shares of Class A common stock as of March 31, 2019 and December 31, 2018, respectively
(5
)
 
(5
)
Total equity before noncontrolling interest
956

 
1,047

Noncontrolling interest
1,088

 
1,112

Total equity
2,044

 
2,159

Total liabilities and equity
$
5,312

 
$
5,294

See accompanying notes to consolidated financial statements.

8


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

 
Three months ended March 31,
 
2019

2018
Revenue:



Electricity sales
$
123


$
102

Other revenue
12


10

Total revenue
135


112

Cost of revenue:



Project expense
40


35

Transmission costs
6

 
7

Depreciation, amortization and accretion
83


55

Total cost of revenue
129


97

Gross profit
6


15

Operating expenses:



General and administrative
11


11

Related party general and administrative
4


4

Total operating expenses
15


15

Operating income (loss)
(9
)


Other income (expense):



Interest expense
(26
)

(25
)
Gain on derivatives
1


6

Earnings (loss) in unconsolidated investments, net
(6
)

18

Net loss on transactions


(1
)
Other expense, net
(2
)

(4
)
Total other expense
(33
)

(6
)
Net loss before income tax
(42
)

(6
)
Income tax provision
4


7

Net loss
(46
)

(13
)
Net loss attributable to noncontrolling interest
(16
)

(149
)
Net income (loss) attributable to Pattern Energy
$
(30
)

$
136

 
 
 
 
Weighted-average number of common shares outstanding



Basic
97,568,427

 
97,428,388

Diluted
97,568,427

 
105,564,491

Net income (loss) per share attributable to Pattern Energy
 
 
 
Basic
$
(0.31
)
 
$
1.39

Diluted
$
(0.31
)
 
$
1.32


See accompanying notes to consolidated financial statements.

9


Pattern Energy Group Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In millions of U.S. dollars)
(Unaudited)

 
Three months ended March 31,
 
2019
 
2018
Net loss
$
(46
)
 
$
(13
)
Other comprehensive income (loss):
 
 
 
Change in foreign currency translation, net of zero tax impact for all periods presented
3

 
(9
)
Cash flow hedge activity:
 
 
 
Change in unrealized gain (loss) on cash flow hedges, net of tax impact of $3 and $1, respectively
(22
)
 
4

Reclassifications to net loss, net of tax impact of less than $(1) for all periods presented

 
1

Total change in cash flow hedge activity
(22
)
 
5

Other comprehensive income (loss) related to equity method investee net of tax impact of $1 and ($1), respectively
(4
)
 
2

Total other comprehensive loss, net of tax
(23
)
 
(2
)
Comprehensive loss
(69
)
 
(15
)
Comprehensive loss attributable to noncontrolling interests, net of tax impact of less than $1 and less than ($1), respectively
(18
)
 
(150
)
Comprehensive income (loss) attributable to Pattern Energy
$
(51
)
 
$
135

See accompanying notes to consolidated financial statements.

10



Pattern Energy Group Inc.
Consolidated Statements of Stockholders’ Equity
(In millions 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, 2017
98,017,860

 
$
1

 
(157,812
)
 
$
(4
)
 
$
1,235

 
$
(112
)
 
$
(26
)
 
$
1,094

 
$
1,254

 
$
2,348

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

 

 

 

 

 

 

 

 

 

Repurchase of shares for employee tax withholding

 

 
(20,097
)
 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 
1

 

 

 
1

 

 
1

Dividends declared ($0.422 per Class A common share)

 

 

 

 
(18
)
 
(24
)
 

 
(42
)
 

 
(42
)
Acquisitions

 

 

 

 

 

 

 

 
11

 
11

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(9
)
 
(9
)
Net income (loss)

 

 

 

 

 
136

 

 
136

 
(149
)
 
(13
)
Other comprehensive loss, net of tax

 

 

 

 

 

 
(1
)
 
(1
)
 
(1
)
 
(2
)
Balances at March 31, 2018
98,274,669

 
$
1

 
(177,909
)
 
$
(4
)
 
$
1,218

 
$

 
$
(27
)
 
$
1,188

 
$
1,106

 
$
2,294

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2018
98,274,669

 
$
1

 
(223,040
)
 
$
(5
)
 
$
1,130

 
$
(27
)
 
$
(52
)
 
$
1,047

 
$
1,112

 
$
2,159

Issuance of Class A common stock under equity incentive award plan, net
224,870

 

 

 

 

 

 

 

 

 

Repurchase of shares for employee tax withholding

 

 
(24,955
)
 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 
1

 

 

 
1

 

 
1

Dividends declared ($0.422 per Class A common share)

 

 

 

 
(41
)
 

 

 
(41
)
 

 
(41
)
Contributions from noncontrolling interests

 

 

 

 

 

 

 

 
5

 
5

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(11
)
 
(11
)
Net loss

 

 

 

 

 
(30
)
 

 
(30
)
 
(16
)
 
(46
)
Other comprehensive loss, net of tax

 

 

 

 

 

 
(21
)
 
(21
)
 
(2
)
 
(23
)
Balances at March 31, 2019
98,499,539

 
$
1

 
(247,995
)
 
$
(5
)
 
$
1,090

 
$
(57
)
 
$
(73
)
 
$
956

 
$
1,088

 
$
2,044


See accompanying notes to consolidated financial statements.

11


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

 
Three months ended March 31,

2019
 
2018
Operating activities

 

Net loss
$
(46
)
 
$
(13
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 


Depreciation, amortization and accretion
90

 
62

Loss on derivatives
5

 
4

Stock-based compensation
1

 
1

Deferred taxes
3

 
7

(Earnings) losses in unconsolidated investments, net
6

 
(18
)
Distributions from unconsolidated investments
7

 
14

Changes in operating assets and liabilities:
 
 


Counterparty collateral asset

 
12

Trade receivables
(23
)
 
(6
)
Other current assets
(6
)
 
2

Other assets (non-current)
(11
)
 
(1
)
Accounts payable and other accrued liabilities
15

 
(19
)
Counterparty collateral liability

 
(12
)
Other current liabilities
(31
)
 
(9
)
Other long-term liabilities
(2
)
 
4

Net cash provided by operating activities
8

 
28

Investing activities

 

Cash paid for acquisitions and investments, net of cash and restricted cash acquired
(7
)
 
(193
)
Capital expenditures
(40
)
 
(61
)
Distributions from unconsolidated investments
7

 

Other assets

 
(17
)
Net cash used in investing activities
(40
)
 
(271
)

12


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

 
Three months ended March 31,

2019
 
2018
Financing activities

 

Dividends paid
(42
)
 
(41
)
Capital contributions - noncontrolling interest
5

 

Capital distributions - noncontrolling interest
(11
)
 
(9
)
Payment for financing fees

 
(6
)
Proceeds from short-term debt
75

 
283

Repayment of short-term debt
(41
)
 
(35
)
Proceeds from long-term debt and other
45

 
113

Repayment of long-term debt and other
(8
)
 
(19
)
Payment for termination of designated derivatives
(3
)
 

Other financing activities
(1
)
 

Net cash provided by financing activities
19

 
286

 
 
 
 
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(2
)
 
(1
)
 
 
 
 
Net change in cash, cash equivalents and restricted cash
(15
)
 
42

Cash, cash equivalents and restricted cash at beginning of period
123

 
138

Cash, cash equivalents and restricted cash at end of period
$
108

 
$
180

Supplemental disclosures

 

Cash payments for income taxes
$
14

 
$

Cash payments for interest expense
$
29

 
$
33

Schedule of non-cash activities


 


Change in property, plant and equipment
$
10

 
$
122


See accompanying notes to consolidated financial statements.

13


Pattern Energy Group Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1.    Organization
Pattern Energy Group Inc. (Pattern Energy or the Company) is a vertically integrated renewable energy company with a mission to transform the world to renewable energy. Our business consists of (i) an operating business segment which is comprised of a portfolio of high-quality renewable energy power projects located in many attractive markets that produces long-term stable cash flows and (ii) ownership interests in an upstream development platform aligned with our operating business which provides us access to a pipeline of projects and potential for higher returns through project development.
The Company holds ownership interests in 24 renewable energy projects with an operating capacity that totals approximately 4 gigawatts (GW) which are located in the United States, Canada and Japan.

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 statement of the Company’s financial position at March 31, 2019, the results of operations and comprehensive income (loss) for the three months ended March 31, 2019 and 2018, respectively, and the cash flows for the three months ended March 31, 2019 and 2018, respectively. The consolidated balance sheet at December 31, 2018 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, 2018.
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 consolidated financial statements.
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 millions):
 
 
March 31,
2019
 
December 31,
2018
Cash and cash equivalents
 
$
93

 
$
101

Restricted cash - current
 

 
4

Restricted cash
 
15

 
18

Cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
 
$
108

 
$
123


14


Leases
The Company determines if an arrangement is a lease at contract inception by evaluating if the contract conveys the right to control the use of an identified asset during the period of use. A right-of-use (ROU) asset represents the Company's right to use an identified asset for the lease term and lease liability represents the Company's obligation to make payments as set forth in the lease arrangement. ROU assets and lease liabilities are included on the Company's consolidated balance sheets beginning January 2019 and are recognized based on the present value of the future lease payments at lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company's incremental borrowing rate, because the interest rate implicit in the lease is generally not readily determinable. A ROU asset initially equals the lease liability, adjusted for any lease payments made prior to lease commencement and any lease incentives. All leases are recorded on the consolidated balance sheets except for leases with an initial term less of than 12 months. All of the Company's leases are operating leases. Lease expense is generally recognized on a straight-line basis over the lease term and is recorded in project expense or general and administrative expense in the consolidated statements of operations.
The Company has lease agreements with lease and non-lease components. Non-lease components primarily include payments for maintenance. The Company combines lease components and non-lease components to account for them together as a single lease component. As such, lease payments represent payments on both lease and non-lease components.
Recently Adopted Accounting Standards
In August 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12), which amends the presentation and disclosure requirements and changes how companies assess effectiveness. The amendments are intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 is effective for annual periods beginning after December 15, 2018, including interim periods within those periods. The Company adopted the standard on January 1, 2019 using a modified retrospective method and recorded an immaterial cumulative effect adjustment to the opening balance of accumulated income (loss) as of January 1, 2019. The adoption did not have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02 or ASC 842), as amended by subsequent standards updates, which requires lessees to recognize ROU 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.
The Company adopted the new standard effective January 1, 2019 using a modified retrospective method and did not restate comparative periods. The most significant impact of the adoption was the recognition of $65 million of ROU assets and $79 million of lease liabilities for operating leases primarily related to corporate offices and land leases in Japan. The difference between the ROU assets and lease liabilities was primarily due to adjustments to the ROU assets to offset a sublease liability and an intangible leasehold interest liability acquired as part of a past business combination. There was no cumulative-effect adjustment for the adoption and the adoption did not have a significant effect on the Company's consolidated statements of operations. The Company elected the practical expedient related to land easements, allowing the Company to carry forward its accounting treatment for land easements on certain existing agreements as its intangible assets. The Company elected to not separate lease and non-lease components and instead treats them as a single lease component. The Company also elected to not record short-term leases with an initial term of 12 months or less on its consolidated balance sheets. Since the Company did not elect the package of practical expedients to carry forward historical lease classification, the Company reassessed its PSAs and land arrangements and determined that all PSAs and the majority of land arrangements were not accounted for as leases under the new standard. The Company further reassessed the PSAs under ASC 815, Derivatives and Hedging (ASC 815) and ASC 606, Revenue from Contracts with Customers (ASC 606) and determined all PSAs previously accounted for under the previous U.S. GAAP leasing standard, ASC 840, Leases (ASC 840) should be accounted for under ASC 606. The reassessment of the PSAs did not have a material impact to the Company's consolidated financial statements. See Note 3, Revenue and Note 10, Leases for further details.
Recently Issued Accounting Standards
Except for the evaluation of recently adopted accounting standards set forth above and 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 not yet adopted 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, 2018.

15


In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, that clarifies and improves areas of guidance related to the recently issued standards on credit losses (ASU 2016-13), hedging (ASU 2017-12), and recognition and measurement of financial instruments (ASU 2016-01). The amendments generally have the same effective dates as their related standards. If already adopted, the amendments of ASU 2016-01 and ASU 2016-13 are effective for fiscal years beginning after December 15, 2019 and the amendments of ASU 2017-12 are effective as of the beginning of the Company’s next annual reporting period. Early adoption is permitted. As discussed above, the Company adopted ASU 2017-12 on January 1, 2019 and does not expect the amendments of ASU 2019-04 will have a material impact on the its consolidated financial statements. The Company continues to evaluate the impact of ASU 2016-13 and will consider the amendments of ASU 2019-04 as part of that process.

3.    Revenue
The Company sells electricity and RECs under the terms of PSAs or at market prices. The Company generally accounts for PSAs as either derivative instruments pursuant to ASC 815 or contracts with customers pursuant to ASC 606. As a result of the adoption of ASC 842 on January 1, 2019, the Company does not expect any PSA entered in the future will meet the definition of a lease. Furthermore, PSAs are generally settled by physical delivery. To the extent that the PSAs meet the definition of derivatives but qualify for the "normal purchase normal sale" (NPNS) scope exception to derivative accounting, the Company elects NPNS scope exception and accounts for the PSAs under ASC 606.
Prior to January 1, 2019, a majority of the Company's revenues were accounted for under legacy lease guidance, ASC 840. On January 1, 2019, the Company adopted the new accounting standard ASC 842 and reassessed all of its PSAs. As a result of the adoption, all PSAs previously accounted for under ASC 840 are accounted for under ASC 606. As the Company elected the modified retrospective method, the comparative period has not been restated and continues to be presented in accordance with ASC 840.
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 millions).
 
 
Three months ended March 31,
 
 
2019
 
2018
Revenue from contracts with customers
 
 
 
 
Electricity sales
 
 
 
 
Electricity sales under PSA (1)
 
$
117

 
$
21

Electricity sales to market
 
4

 
2

Stand-alone REC sales
 
1

 
2

Electricity sales from contracts with customers
 
122

 
25

Other revenue
 
 
 
 
Related party management service fees
 
2

 
2

Other revenue from contracts with customers
 
2

 
2

Total revenue from contracts with customers
 
124

 
27

Other electricity sales (2)
 
1

 
77

Other revenue
 
10

 
8

Total revenue
 
$
135

 
$
112


16


(1) 
Includes contracts accounted for under ASC 606 beginning January 1, 2019 as a result of the adoption of ASC 842.
(2) 
Includes revenue from PSAs accounted for as leases under ASC 840 for prior period and an energy hedge contract accounted for as a derivative under ASC 815.
Electricity Sales from Contracts with Customers
The Company generates revenues primarily by delivering electricity and, where applicable, the associated self-generated RECs to customers under PSAs and market participants. The revenues are primarily determined by the price under the PSAs or market price multiplied by the amount of electricity that the Company delivers.
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 MWh 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. In bundled PSAs, revenue from the sale of self-generated RECs is recognized when the related electricity is generated and simultaneously delivered even in cases where there is a certification lag as the certification has been deemed to be perfunctory. Since the timing of recognition of revenue for electricity and the associated self-generated RECs is the same and occurs over time, it is unnecessary to allocate transaction price to the two performance obligations. The Company generally recognizes revenue based on the amount metered and invoiced on the basis of the contract 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 the variable portion of the remaining performance obligations for contracts for which it recognizes revenue as invoiced.
The Company also generates a small fraction of its revenue by delivering RECs on a stand-alone basis. Each promise to deliver stand-alone 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 revenue related to the stand-alone RECs is recognized at the point in time at which control of the energy credits is transferred to customers.
Related Party Management Service Fees
Related party revenue management service fees represent revenue recognized from the services provided by the Company, under Management, Operations and Maintenance Agreements (MOMAs) and Project Administration Agreements (PAAs) with certain wind farms that are consolidated subsidiaries of Pattern Development Companies or entities the Company accounts for as equity investments. Under these agreements, the Company provides services to the various wind farms, typically for a fixed annual fee payable in monthly installments, which escalates with the consumer price index (CPI) on an annual basis. The services by the Company to the wind farm under the agreement each month represent a single performance obligation, which is delivered to the project over time and is invoiced at a fixed price per month and will be recognized over time as invoiced to the respective wind farm.
Remaining performance obligations represent the fixed monthly installments for which services have not been performed. The transaction price is determined on the basis of the stated contract price.
Transaction Price Allocated to the Remaining Performance Obligations
As of March 31, 2019, revenue expected to be recognized from remaining performance obligations associated with fixed considerations for PSAs, stand-alone RECs and related party management service fees are as follows (in millions):

 
Amount
2019 (remainder)
 
$
55

2020
 
73

2021
 
73

2022
 
70

2023
 
68

Thereafter
 
300

Total
 
$
639


17


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 generally did not record any contract liabilities as it generally 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. However, for one PSA, the Company has a contract liability related to amounts received in advance from the PSA customer for access to the switchyard required in the delivery of electricity. The Company recognized less than $1 million as revenue during the three months ended March 31, 2019.

4.    Acquisitions
Japan Acquisition
On March 7, 2018, the Company acquired (1) Tsugaru Holdings, which owns a 122 MW wind project company located in Aomori Prefecture, Japan that is expected to commence commercial operations in early to mid-2020; (2) Ohorayama, a 33 MW wind project company located in Kochi Prefecture, Japan that commenced commercial operations in March 2018; (3) Kanagi, a 10 MW solar project company located in Shimane Prefecture, Japan that commenced commercial operations in 2006; (4) Otsuki, a 12 MW wind project company located in Kochi Prefecture, Japan that commenced commercial operations in 2006; and (5) Futtsu, a 29 MW solar project company located in Chiba Prefecture, Japan that commenced commercial operations in 2016 (collectively referred to as the Japan Acquisition) for total consideration of $264 million, net of cash acquired, of which $103 million is a contingent payment as of March 31, 2019. The Company completed the purchase price allocation for the Japan acquisition as of December 31, 2018. Further details were disclosed within the Company's 2018 Annual Report on Form 10-K.
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.
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 pro forma net loss was adjusted to exclude nonrecurring transaction related expenses of $1 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.
 
 
Three months ended March 31,
Unaudited pro forma data (in millions)
 
2018
Pro forma total revenue
 
$
115

Pro forma total expenses
 
(127
)
Pro forma net loss
 
(12
)
Less: pro forma net loss attributable to noncontrolling interest
 
(148
)
Pro forma net income attributable to Pattern Energy
 
$
136



18


5.    Property, Plant and Equipment
The following presents the categories within property, plant and equipment (in millions):
 
March 31,
 
December 31,
 
2019
 
2018
Operating wind farms
$
4,987

 
$
4,972

Transmission line
94

 
94

Furniture, fixtures and equipment
17

 
16

Subtotal
5,098

 
5,082

Less: accumulated depreciation
(1,046
)
 
(963
)
Property, plant and equipment, net
$
4,052

 
$
4,119

The Company recorded depreciation expense related to property, plant and equipment of $80 million and $54 million for the three months ended March 31, 2019 and 2018, respectively.

6.     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, Broadview Energy Holdings LLC (a subsidiary of Broadview Project), MSM and Stillwater New Energy Holdings LLC are VIEs and as the managing member of the respective partnerships, it is the primary beneficiary by reference to the power and benefits criterion under ASC 810, Consolidation. The Company considered responsibilities within the contractual agreements, which grant it the power to direct the activities of the VIE that most significantly impact the VIE's economic performance. Such activities include management of the wind farms' operations and maintenance, budgeting, policies and procedures. In addition, the Company has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs on the basis of the income allocations and cash distributions.
The Company’s equity method investment in Pattern Development is considered to be a VIE primarily because the total equity at risk is not sufficient to permit Pattern Development 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 was $140 million as of March 31, 2019. The Company's maximum exposure to loss is equal to the carrying value of its investment in Pattern Development.

19


The following table summarizes the carrying amounts of major consolidated balance sheet items for consolidated VIEs as of March 31, 2019 and December 31, 2018 (in millions). All assets (excluding deferred financing costs, net and intangible assets, net) and liabilities of a consolidated VIE presented below are (1) assets that can be used only to settle obligations of the VIE or (2) liabilities for which creditors do not have recourse to the general credit of the primary beneficiary.
 
March 31,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
34

 
$
36

Restricted cash

 
4

Trade receivables
28

 
13

Prepaid expenses
4

 
6

Other current assets
10

 
2

Total current assets
76

 
61

 
 
 
 
Restricted cash
3

 
3

Construction in progress

 
1

Property, plant and equipment, net
2,134

 
2,156

Deferred financing costs, net
2

 
2

Intangible assets, net
11

 
12

Other assets
12

 
12

Total assets
$
2,238

 
$
2,247

 
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued liabilities
$
33

 
27

Accrued construction costs
1

 
1

Current portion of long-term debt, net
5

 
4

Other current liabilities
6

 
5

Total current liabilities
45

 
37

 
 
 
 
Long-term debt, net
150

 
149

Intangible liability, net
47

 
48

Asset retirement obligations
58

 
57

Other long-term liabilities
37

 
36

Deferred revenue
27

 
26

Total liabilities
$
364

 
$
353



20


7.    Unconsolidated Investments
The Company's unconsolidated investments consist of the following for the periods presented below (in millions):
 
 
 
 
 
Percentage of Ownership
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
South Kent
$
2

 
$
5

 
50
%
 
50
%
Grand
4

 
5

 
45
%
 
45
%
Armow
111

 
116

 
50
%
 
50
%
Pattern Development
140


144

 
29
%

29
%
Unconsolidated investments
$
257

 
$
270

 
 
 
 
Pattern Development
Under the Second Amended and Restated Agreement of Limited Partnership of Pattern Development, the Company has the right but not the obligation to contribute up to $300 million to Pattern Development. As of March 31, 2019, the Company has funded $190 million in aggregate and holds an approximately 29% ownership interest in Pattern Development. The Company is a noncontrolling investor in Pattern Development, but has significant influence over Pattern Development. Accordingly, the investment is accounted for under the equity method of accounting.
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, 2019 and 2018, the Company recorded basis difference amortization for its unconsolidated investments of $2 million and $3 million, respectively, in earnings in unconsolidated investments, net on the consolidated statements of operations.
Summarized Financial Data for Equity Method Investees
The following table presents summarized statements of operations information for the three months ended March 31, 2019 and 2018 for the Company's equity method investees (in millions):
 
Three months ended March 31,
 
2019
 
2018
Revenue
$
68

 
$
110

Cost of revenue
18

 
30

Operating expenses
48

 
19

Other expense
30

 
21

Net income (loss)
$
(28
)
 
$
40



21


8.    Debt
The Company’s debt consists of the following for periods presented below (in millions):
 
 
 
 
 
As of March 31, 2019
 
March 31, 2019
 
December 31, 2018
 
Contractual Interest Rate
 
Effective Interest Rate
 
 
 
 
 
 
 
Maturity
Corporate-level
 
 
 
 
 
 
 
 
 
Corporate Revolving Credit Facility
$
234

 
$
198

 
Varies

(1) 
4.09
%
(1) 
November 2022
2020 Notes
225

 
225

 
4.00
%
 
6.60
%
 
July 2020
2024 Notes
350

 
350

 
5.88
%
 
5.88
%
 
February 2024
Project-level
 
 
 
 
 
 
 
 
 
Fixed interest rate
 
 
 
 
 
 
 
 
 
Santa Isabel term loan
99

 
100

 
4.57
%
 
4.57
%
 
September 2033
Mont Sainte Marguerite-med term loan
61

 
62

 
3.97
%
 
3.97
%
 
December 2029
Mont Sainte Marguerite-long term loan
95

 
93

 
5.04
%
 
5.04
%
 
June 2042
Variable interest rate
 
 
 
 
 
 
 
 
 
Japan Credit Facility
24

 
25

 
Varies

(5) 
1.82
%
 
August 2022
Ocotillo commercial term loan
281

 
281

 
4.10
%
 
4.07
%
(3) 
June 2033
St. Joseph term loan (2)
153

 
152

 
3.77
%
 
4.08
%
(3) 
 November 2033
Western Interconnect term loan
52

 
52

 
3.99
%
 
4.21
%
(3) 
May 2034
Meikle term loan (2)
240

 
239

 
3.52
%
 
3.94
%
(3) 
May 2024
Futtsu term loan
73

 
75

 
1.07
%
 
1.85
%
(3) 
December 2033
Ohorayama term loan
91

 
93

 
0.87
%
 
0.88
%
(3) 
February 2036
Tsugaru Construction Loan
174

 
131

 
0.72
%
 
0.72
%

March 2038
Tsugaru Holdings Loan Agreement
59

 
59

 
3.13
%
 
3.13
%

July 2022
Imputed interest rate
 
 
 
 
 
 
 
 
 
Hatchet Ridge financing lease obligation
180

 
180

 
1.43
%
 
1.43
%
 
December 2032
 
2,391

 
2,315

 
 
 
 
 
 
Unamortized discount, net (4)
(9
)
 
(11
)
 
 
 
 
 
 
Unamortized financing costs
(20
)
 
(21
)
 
 
 
 
 
 
Total debt, net
2,362

 
2,283

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As reflected on the consolidated balance sheets
 
 
 
 
 
 
 
 
 
Revolving credit facility, current
$
234

 
$
198

 
 
 
 
 
 
Revolving credit facility
24

 
25

 
 
 
 
 
 
Current portion of long-term debt, net of financing costs
59

 
56

 
 
 
 
 
 
Long term debt, net of financing costs
2,045

 
2,004

 
 
 
 
 
 
Total debt, net
$
2,362

 
$
2,283

 
 
 
 
 
 
(1) 
Refer to Corporate Revolving Credit Facility in the Annual Report on Form 10-K for the year ended December 31, 2018 for interest rate details.
(2) 
The amortization for the St. Joseph term loan and the Meikle term loan are through September 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 9, Derivative Instruments, for discussion of interest rate swaps.
(4) 
The discount relates to the 2020 Notes and MSM term loans.
(5) 
Refer to Japan Credit Facility for interest rate details.

22


Interest and commitment fees incurred and interest expense for debt consisted of the following (in millions):
 
Three months ended March 31,
 
2019
 
2018
Corporate-level interest and commitment fees incurred
$
11

 
$
9

Project-level interest and commitment fees incurred
14

 
14

Capitalized interest, commitment fees, and letter of credit fees
(1
)
 

Amortization of debt discount/premium, net
1

 
1

Amortization of financing costs
1

 
1

Interest expense
$
26

 
$
25

Corporate Level Debt
Corporate Revolving Credit Facility
On November 21, 2017, certain of the Company's subsidiaries have entered into a Second Amended and Restated Credit and Guaranty Agreement (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, 2019, $162 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, 2019, the Company's holding company subsidiaries were in compliance with covenants contained in the Revolving Credit Facility.
As of March 31, 2019 and December 31, 2018, letters of credit of $44 million and $45 million, respectively, were issued under the Revolving Credit Facility.
2020 Notes
In July 2015, the Company issued $225 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 millions):
 
March 31,
2019
 
December 31,
2018
Principal
$
225

 
$
225

Less:

 

Unamortized debt discount
(7
)
 
(8
)
Unamortized financing costs
(1
)
 
(2
)
Carrying value of convertible senior notes
$
217

 
$
215

Carrying value of the equity component (1)
$
24

 
$
24

(1) 
Included in the consolidated balance sheets as additional paid-in capital, net of $1 million in equity issuance costs.

23


Project Debt
Japan Credit Facility
In August 2018, GPG entered into a credit agreement for a revolving credit facility (the Japan Credit Facility). Under the Japan Credit Facility, GPG may borrow up to $32 million and the Japan Credit Facility matures in August 2022. The base rate is based on the Japan Credit Facility Tokyo Interbank Offered Rate (TIBOR) plus an applicable margin between 1.75% and 2.25% plus an annual commitment fee of 0.30%. As of March 31, 2019, $8 million was available for borrowing.
Tsugaru Facility
In March 2018, Tsugaru entered into a credit agreement for a construction facility (Tsugaru Construction Loan), a term facility, a letter of credit facility (the LC Facility) and a Japanese consumption tax facility (the JCT Facility) (collectively, the Tsugaru Facility). Under the Tsugaru Facility, up to $371 million may be borrowed 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 Tsugaru Construction Loan, 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 Tsugaru Construction Loan and term facility is TIBOR plus 0.65%. The LC Facility establishes a $20 million debt service reserve account letter of credit and an $8 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 $34 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. A commitment fee of 0.3% is owed 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, 2019, outstanding borrowings under the Tsugaru Construction Loan totaled $174 million.
Tsugaru Holdings Loan Agreement
In March 2018, Tsugaru Holdings entered into a loan agreement (Tsugaru Holdings Loan Agreement) that provides for borrowings of up to $70 million during the Tsugaru construction period, until no later than September 2020. The interest rate on outstanding borrowings under the Tsugaru Holdings 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 Tsugaru Holdings Loan Agreement. The Tsugaru Holdings Loan Agreement is subject to certain covenants and is secured by the membership interests and other rights. As of March 31, 2019, outstanding borrowings under the Tsugaru Holdings Loan Agreement totaled $59 million.

9.    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 Japan. 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, 2019, the Company also 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.

24


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 millions):
 
 
March 31, 2019
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Current
 
Long-Term
 
Current
 
Long-Term
Fair Value of Designated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$

 
$
3

 
$
44

 
 
 
 
 
 
 
 
 
Fair Value of Undesignated Derivatives
 
 
 
 
 
 
 
 
Energy derivative
 
$
2

 
$

 
$

 
$

Foreign currency forward contracts
 
5

 
7

 

 
1

Total Fair Value
 
$
7

 
$
7

 
$
3

 
$
45

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Current
 
Long-Term
 
Current
 
Long-Term
Fair Value of Designated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
3

 
$
2

 
$
25

 
 
 
 
 
 
 
 
 
Fair Value of Undesignated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$

 
$

 
$
4

Energy derivative
 
7

 

 

 

Foreign currency forward contracts
 
6

 
6

 

 
2

Congestion revenue rights
 
1

 

 

 

Total Fair Value
 
$
14

 
$
9

 
$
2

 
$
31



25


The following table summarizes the notional amounts of the Company's outstanding derivative instruments (in millions except for MWh):
 
 
Unit of Measure
 
March 31,
 
December 31,
 
 
 
2019
 
2018
Designated Derivative Instruments
 
 
 
 
 
 
Interest rate swaps
 
USD
 
$
319

 
$
319

Interest rate swaps
 
CAD
 
$
1,523

 
$
721

Interest rate swaps
 
JPY
 
¥
55,377

 
¥
55,675

 
 
 
 
 
 
 
Undesignated Derivative Instruments
 
 
 
 
 
 
Interest rate swaps
 
USD
 
$

 
$
138

Energy derivative
 
MWh
 
52,638

 
193,252

Foreign currency forward contracts
 
CAD
 
$
98

 
$
106

Foreign currency forward contracts
 
JPY
 
¥
11,362

 
¥
11,589

Congestion revenue rights
 
MWh
 
424

 
505

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 hedge is reported as a component of accumulated other comprehensive loss and reclassified into earnings in the period or periods during which cash settlement occurs. The designated interest rate swaps have remaining maturities ranging from approximately 4.8 years to 24.0 years as of March 31, 2019.
The following table presents the pre-tax effect of the hedging instruments designated as cash flow recognized in accumulated other comprehensive loss, amounts reclassified to earnings for the following periods, as well as, amounts recognized in interest expense (in millions):
 
 
 
 
Three months ended March 31,
 
 
Description
 
2019
 
2018
Gains (losses) recognized in accumulated OCI
 
Change in fair value (1)
 
$
(25
)
 
$
3

Losses reclassified from accumulated OCI into:
 
 
 
 
 
 
Interest expense
 
Derivative settlements
 
$

 
$
(2
)
Gain recognized in interest expense
 
Ineffective portion (2)
 
$

 
$
1

(1) 
For 2018, the amount represents effective portion only as the Company adopted ASU 2017-12 on January 1, 2019.
(2) 
Applies to 2018 only as a result of the adoption of ASU 2017-12 on January 1, 2019.
The Company estimates that $4 million in accumulated other loss will be reclassified into earnings over the next twelve months.

26


Derivatives Not Designated as Hedging Instruments
The following table presents gains and losses on derivatives not designated as hedges (in millions):
 
 
Financial Statement Line Item
 
Three months ended March 31,
Derivative Type
 
 
2019
 
2018
Interest rate derivatives
 
Gain on derivatives
 
$
(1
)
 
$
2

Energy derivative
 
Electricity sales
 
$

 
$
(6
)
Foreign currency forward contracts
 
Gain on derivatives
 
$
2

 
$
4

Interest Rate Derivatives
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 derivatives in the consolidated statements of operations as these hedges are not accounted for under hedge accounting. As of March 31, 2019, the Company terminated all of its undesignated interest rate swaps.
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 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. The energy derivative expired in April 2019. The Company has secured a short-term derivative instrument to continue to manage its exposure to variable electricity prices at Gulf Wind. The Company is currently evaluating the accounting treatment of the instrument.
As a result of the counterparty's credit rating downgrade, the Company received collateral related to the energy derivative agreement. As of March 31, 2019, the Company has recorded a current asset of $6 million to counterparty collateral and a current liability of $6 million to counterparty collateral liability representing the collateral received and corresponding obligation to return the collateral, respectively.
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 and Japanese yen. The Company enters into foreign currency forward and option contracts at various times to mitigate the currency exchange rate risk on Canadian dollar and, beginning in 2018, Japanese yen denominated cash flows. These instruments have remaining maturities ranging from three months to 11.0 years. The foreign currency forward and option 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 gain (loss) on derivatives in the consolidated statements of operations.
Congestion Revenue Rights
Congestion revenue rights are financial instruments which were acquired via auction in the ERCOT power market that enable the Company to manage variability in electric energy congestion charges due to transmission grid limitations. The Company’s congestion revenue rights 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 gain (loss) on derivatives in the consolidated statements of operations.


27


10.    Leases
The Company has operating leases for corporate offices, lands for its wind and solar facilities, and certain equipment. The leases have remaining lease terms of 1 year to 19 years, some of which may include renewal and extension options. Generally, these options do not impact the lease term because the Company is not reasonably certain that it will exercise the options.
The Company subleases its former headquarters to a third-party. As the Company remains the primary obligor under the original lease, which expires in 2026, the Company continues to account for the lease as an operating lease. Sublease income is recognized on a straight-line basis over the remaining life of the sublease. As of March 31, 2019, future sublease proceeds under the sublease agreement are approximately $1 million for the remainder of 2019 and $2 million per year for 2020 through 2026.
Supplemental balance sheet information related to leases are as follows (in millions):
Operating leases
 
Balance sheet location
 
March 31, 2019
Operating lease right-of-use assets
 
Other assets
 
$
64

Operating lease liabilities, current
 
Other current liabilities
 
(10
)
Operating lease liabilities
 
Other long-term liabilities
 
(69
)
Total operating lease liabilities
 
 
 
$
(79
)
As of March 31, 2019, maturities of operating lease liabilities were as follows (in millions):
Remainder of 2019
 
6

2020
 
9

2021
 
9

2022
 
9

2023
 
9

Thereafter
 
50

Total lease payment
 
$
92

Less imputed interest
 
(13
)
Total
 
$
79

The components of lease expense are as follows (in millions):
 
 
Three months ended
March 31, 2019
Operating lease cost
 
$
2

Sublease income
 
(1
)
Total lease cost
 
$
1

Supplemental cash flow and other information related to the Company's operating leases are as follows (in millions, except for lease term and discount rate):
 
 
Three months ended
March 31, 2019
Operating cash flows from operating leases (1)
 
$
(3
)
Right of use assets obtained in exchange for new operating lease obligations (2)
 
$

Weighted average remaining lease term (years):
 
11.4

Weighted average discount rate(3):
 
3.29
%
(1) 
Represents cash paid for amounts included in the measurement of lease liabilities.
(2) 
Represents non-cash activity and accordingly, is not reflected in the consolidated statements of cash flows.

28


(3) 
When an implicit rate is not readily determinable, the interest rate used to determine the present value of the future lease payments is the Company's incremental borrowing rate.
As of March 31, 2019, the Company does not have any significant leases that have not yet commenced.
As of December 31, 2018, estimated future commitments related to operating leases and land agreements were as follows (in millions):
2019

$
22

2020

21

2021

22

2022

21

2023

22

Thereafter

352

Total

$
460

These amounts include certain land agreements not accounted for as leases under ASC 842, which are excluded from the lessee's maturity analysis presented above.

11.    Accumulated Other Comprehensive Loss
The following tables summarize the changes in the accumulated other comprehensive loss balance, net of tax, by component (in millions):
 
Foreign Currency
 
Effective Portion of Change in Fair Value of Derivatives
 
Proportionate Share of Equity Investee’s OCI
 
Total
Balances at December 31, 2017
$
(28
)
 
$
(4
)
 
$
7

 
$
(25
)
Other comprehensive income (loss) before reclassifications
(9
)
 
4

 
1

 
(4
)
Amounts reclassified from accumulated other comprehensive loss

 
1

 
1

 
2

Net current period other comprehensive income (loss)
(9
)
 
5

 
2

 
(2
)
Balances at March 31, 2018
$
(37
)
 
$
1

 
$
9

 
$
(27
)
 
Foreign Currency
 
Effective Portion of Change in Fair Value of Derivatives
 
Proportionate Share of Equity Investee’s OCI
 
Total
Balances at December 31, 2018
$
(65
)
 
$
(4
)
 
$
9

 
$
(60
)
Other comprehensive income (loss) before reclassifications
3

 
(22
)
 
(4
)
 
(23
)
Amounts reclassified from accumulated other comprehensive loss

 

 

 

Net current period other comprehensive income (loss)
3

 
(22
)
 
(4
)
 
(23
)
Balances at March 31, 2019
$
(62
)
 
$
(26
)
 
$
5

 
$
(83
)

12.    Fair Value Measurements
Fair Value
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

29


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 valuation 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. 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 millions):
 
March 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Energy derivative
$

 
$

 
$
2

 
$
2

Foreign currency forward contracts

 
11

 

 
11

Congestion revenue rights




1


1

 
$

 
$