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 transition 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 28 renewable energy projects with an operating capacity that totals approximately 4.4 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 September 30, 2019, the results of operations and comprehensive income (loss) for the three and nine months ended September 30, 2019 and 2018, respectively, and the cash flows for the nine months ended September 30, 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):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31,
2018
|
Cash and cash equivalents
|
|
$
|
106
|
|
|
$
|
101
|
|
Restricted cash - current
|
|
—
|
|
|
4
|
|
Restricted cash
|
|
13
|
|
|
18
|
|
Cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
|
|
$
|
119
|
|
|
$
|
123
|
|
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 of less 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.
Sales Tax Receivable
Sales tax receivable includes consumption or sales taxes paid by the Company most of which relate to exempt construction costs at Tsugaru and are expected to reimbursed by the local Japan tax authorities.
Development Expenses
Development expenses include changes to contingent consideration related to agreed purchase price adjustments in certain acquisitions. See Note 13, Fair Value Measurements for additional discussion of these changes.
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 initial 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 11, 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.
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 (ASU 2019-04), 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.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires the measurement of all expected credit losses for financial assets including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (ASU 2018-19). ASU 2018-19 clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. In May 2019, the FASB issued ASU 2019-05, Targeted Transition Relief (ASU 2019-05), which amends Topic 326. ASU 2019-05 provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company continues to evaluate the impact of ASU 2016-13 and will consider the amendments of ASU 2019-05 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 future PSAs entered into to meet the definition of a lease. Furthermore, to the extent that PSAs meet the definition of derivatives but qualify for the "normal purchase normal sale" (NPNS) scope exception, as defined in ASC 815, the Company elects NPNS scope exception, as PSAs are generally settled by physical delivery. As such, the Company primarily accounts for its PSAs in accordance with 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).
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue from contracts with customers
|
|
|
|
|
|
|
|
|
Electricity sales
|
|
|
|
|
|
|
|
|
Electricity sales under PSA (1)
|
|
$
|
101
|
|
|
$
|
17
|
|
|
$
|
347
|
|
|
$
|
55
|
|
Electricity sales to market
|
|
12
|
|
|
5
|
|
|
19
|
|
|
12
|
|
Stand-alone REC sales
|
|
2
|
|
|
1
|
|
|
5
|
|
|
6
|
|
Electricity sales from contracts with customers
|
|
115
|
|
|
23
|
|
|
371
|
|
|
73
|
|
Other revenue
|
|
|
|
|
|
|
|
|
Related party management service fees
|
|
3
|
|
|
2
|
|
|
8
|
|
|
7
|
|
Other revenue from contracts with customers
|
|
3
|
|
|
2
|
|
|
8
|
|
|
7
|
|
Total revenue from contracts with customers
|
|
118
|
|
|
25
|
|
|
379
|
|
|
80
|
|
Other electricity sales (2)
|
|
—
|
|
|
93
|
|
|
2
|
|
|
281
|
|
Other revenue
|
|
1
|
|
|
—
|
|
|
13
|
|
|
9
|
|
Total revenue
|
|
$
|
119
|
|
|
$
|
118
|
|
|
$
|
394
|
|
|
$
|
370
|
|
|
|
(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 September 30, 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)
|
|
$
|
18
|
|
2020
|
|
72
|
|
2021
|
|
72
|
|
2022
|
|
69
|
|
2023
|
|
67
|
|
Thereafter
|
|
285
|
|
Total
|
|
$
|
583
|
|
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 and $1 million as revenue during the three and nine months ended September 30, 2019, respectively.
4. Divested Operations
Chilean Sale
On May 21, 2018, the Company, through its indirect wholly-owned subsidiaries, entered into a stock purchase agreement with a third party pursuant to which the Company agreed to sell, and the buyer agreed to purchase, certain subsidiaries which hold approximately a 71% interest in El Arrayán Wind and assets and rights relating to ownership and operation of an extension of the trunk transmission system in Chile (Chilean Sale). El Arrayán Wind is a wind electric generation facility located approximately 400 kilometers north of Santiago on the coast of Chile in which the Company had an owned interest of approximately 81 MW.
On August 20, 2018, the Company completed the Chilean Sale for cash proceeds of $70 million. The Company measured impairment expense as the difference between the carrying amount of the net assets and the sales price less estimated costs to sell. As a result, the Company recorded a total impairment expense of $3 million and $7 million for the three and nine months ended September 30, 2018, respectively.
5. Acquisitions
Asset Acquisition
MSM Acquisition
On August 10, 2018, the Company subscribed for 51% limited partnership interest in MSM LP Holdings LP, which holds 99.98% of the economic interests in MSM. MSM operates the approximately 143 MW wind project located in the Chaudière-Appalaches region south of Québec City, Canada, which achieved commercial operation in the first quarter of 2018. The Company also acquired (1) 70% of the issued and outstanding shares in the capital of Pattern MSM GP Holdings Inc. and (2) 70% of the issued and outstanding shares in the capital of Pattern Development MSM Management ULC from Pattern Energy Group LP for aggregate consideration of $31 million, net of cash acquired. The Company completed the purchase price allocation for the MSM acquisition as of December 31, 2018. Further details were disclosed within the Company's 2018 Annual Report on Form 10-K.
Business Combination
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 2016; (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 $122 million is a current contingent payment as of September 30, 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 and nine months ended September 30, 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 September 30,
|
|
Nine months ended September 30,
|
Unaudited pro forma data (in millions)
|
|
2018
|
|
2018
|
Pro forma total revenue
|
|
$
|
118
|
|
|
$
|
374
|
|
Pro forma total expenses
|
|
(150
|
)
|
|
(419
|
)
|
Pro forma net loss
|
|
(32
|
)
|
|
(45
|
)
|
Less: pro forma net loss attributable to noncontrolling interest
|
|
(19
|
)
|
|
(202
|
)
|
Pro forma net income (loss) attributable to Pattern Energy
|
|
$
|
(13
|
)
|
|
$
|
157
|
|
6. Property, Plant and Equipment
The following presents the categories within property, plant and equipment (in millions):
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2019
|
|
2018
|
Operating wind farms
|
$
|
5,001
|
|
|
$
|
4,972
|
|
Transmission line
|
94
|
|
|
94
|
|
Furniture, fixtures and equipment
|
19
|
|
|
16
|
|
Subtotal
|
5,114
|
|
|
5,082
|
|
Less: accumulated depreciation
|
(1,197
|
)
|
|
(963
|
)
|
Property, plant and equipment, net
|
$
|
3,917
|
|
|
$
|
4,119
|
|
The Company recorded depreciation expense related to property, plant and equipment of $75 million and $230 million for the three and nine months ended September 30, 2019, respectively, and recorded $54 million and $162 million for the same periods in the prior year, respectively.
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, Broadview Energy Holdings LLC (a subsidiary of Broadview Project), MSM, Stillwater New Energy Holdings LLC, North Kent Wind 1 LP Holdings LP. and Pattern Belle River GP Holdings Inc. 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 $123 million as of September 30, 2019. The Company's maximum exposure to loss is equal to the carrying value of its investment in Pattern Development.
The following table summarizes the carrying amounts of major consolidated balance sheet items for consolidated VIEs as of September 30, 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.
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31,
2018
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
32
|
|
|
$
|
36
|
|
Restricted cash
|
—
|
|
|
4
|
|
Trade receivables
|
19
|
|
|
13
|
|
Prepaid expenses
|
3
|
|
|
6
|
|
Other current assets
|
4
|
|
|
2
|
|
Total current assets
|
58
|
|
|
61
|
|
|
|
|
|
Restricted cash
|
2
|
|
|
3
|
|
Construction in progress
|
—
|
|
|
1
|
|
Property, plant and equipment, net
|
2,083
|
|
|
2,156
|
|
Unconsolidated investments
|
54
|
|
|
—
|
|
Deferred financing costs, net
|
1
|
|
|
2
|
|
Intangible assets, net
|
11
|
|
|
12
|
|
Other assets
|
18
|
|
|
12
|
|
Total assets
|
$
|
2,227
|
|
|
$
|
2,247
|
|
|
|
|
|
Liabilities
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable and other accrued liabilities
|
$
|
26
|
|
|
27
|
|
Accrued construction costs
|
—
|
|
|
1
|
|
Current portion of long-term debt, net
|
5
|
|
|
4
|
|
Other current liabilities
|
5
|
|
|
5
|
|
Total current liabilities
|
36
|
|
|
37
|
|
|
|
|
|
Long-term debt, net
|
150
|
|
|
149
|
|
Intangible liability, net
|
45
|
|
|
48
|
|
Asset retirement obligations
|
59
|
|
|
57
|
|
Other long-term liabilities
|
42
|
|
|
36
|
|
Deferred revenue
|
26
|
|
|
26
|
|
Total liabilities
|
$
|
358
|
|
|
$
|
353
|
|
8. Unconsolidated Investments
The Company's unconsolidated investments consist of the following for the periods presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Ownership
|
|
September 30,
|
|
December 31,
|
|
September 30,
|
|
December 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Belle River
|
$
|
32
|
|
|
$
|
—
|
|
|
22
|
%
|
|
—
|
%
|
North Kent
|
22
|
|
|
—
|
|
|
35
|
%
|
|
—
|
%
|
South Kent (1)
|
—
|
|
|
5
|
|
|
50
|
%
|
|
50
|
%
|
Grand (2)
|
—
|
|
|
5
|
|
|
45
|
%
|
|
45
|
%
|
Armow
|
104
|
|
|
116
|
|
|
50
|
%
|
|
50
|
%
|
Pattern Development
|
123
|
|
|
144
|
|
|
29
|
%
|
|
29
|
%
|
Unconsolidated investments
|
$
|
281
|
|
|
$
|
270
|
|
|
|
|
|
|
|
(1)
|
Refer to "Suspension of Equity Method Accounting" for details.
|
|
|
(2)
|
As of September 30, 2019, our investment balance was less than $1 million.
|
Acquisition of Belle River
On August 2, 2019, Belle River LP Holdings LP (New BR LP), on behalf of the Company and PSP Investments, as a noncontrolling interest, entered into and consummated a Purchase and Sale Agreement with Pattern Energy Group LP to acquire its 42.5% interest in Belle River, 100% interest in Pattern Belle River GP Holdings Inc. and certain other assets including a loan receivable for $37 million. Belle River is a joint venture wind farm development which operates under a 20-year PPA and commenced commercial operation in September 2017. Of the $37 million purchase price, the Company paid $16 million for a 21.7% ownership interest in Belle River and $2 million for the loan receivable while PSP Investments contributed $17 million for a 20.8% ownership in Belle River and $2 million for the loan receivable. The $4 million loan receivable is recorded in other assets on the consolidated balance sheet of the Company.
On the acquisition date, the Company determined the fair value of the identifiable assets and assumed liabilities in accordance with ASC 805, Business Combinations (ASC 805). The resulting fair values were compared to the assets and liabilities recorded in Belle River, and a basis difference of $7 million, which was primarily attributable to the power purchase agreement was determined. The Company will amortize the basis difference attributable to the PPA over its contractual life.
New BR LP, which is consolidated by the Company, accounts for its investment in Belle River under the equity method of accounting because it has significant influence over Belle River. The Company's owned capacity in Belle River is 22 MW.
Acquisition of North Kent
On August 2, 2019, the Company entered into and consummated a Purchase and Sale Agreement (NK PSA) with Pattern Energy Group LP to acquire its 100% interest in Pattern North Kent Wind 1 GP Holdings Inc. and North Kent Wind 1 LP Holdings LP (New NK LP) and certain other assets including a loan receivable for $26 million. Per the NK PSA, the Company indirectly acquired New NK LP's 35% interest in North Kent. North Kent is a joint venture wind farm development which operates under a 20-year PPA and commenced commercial operation in February 2018. Of the $26 million purchase price, the Company paid $3 million for a loan receivable that is recorded in other assets on the consolidated balance sheet of the Company.
On the acquisition date, the Company determined the fair value of the identifiable assets and assumed liabilities in accordance with ASC 805. The resulting fair values were compared to the assets and liabilities recorded in North Kent, and a basis difference of $13 million, which was primarily attributable to the power purchase agreement was determined. The Company will amortize the basis difference attributable to the PPA over its contractual life.
New NK LP, which is consolidated by the Company, accounts for its investment in North Kent under the equity method of accounting because it has significant influence over North Kent. The Company's owned capacity in North Kent is 35 MW.
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 invest up to $300 million to Pattern Development. As of September 30, 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.
Suspension of Equity Method Accounting
When the Company receives distributions in excess of the carrying value of its investment, and the Company is not liable for the obligations of the investee nor otherwise committed to provide financial support the Company will: 1) suspend recognition of equity method earnings (losses); 2) record such excess distributions as earnings (loss) in unconsolidated investments, net in the period the distributions occur; and 3) suspend equity in earnings (losses) or equity in other comprehensive income of unconsolidated investments, if applicable.
During the third quarter 2019, the Company's unconsolidated investment in South Kent was in suspension. As of September 30, 2019, the Company's unconsolidated investment for South Kent was zero. In accordance with ASC 323, Investments - Equity Method and Joint Ventures, the Company suspended recognition of South Kent's equity method earnings until such time when South Kent's cumulative equity method earnings exceeds cumulative distributions received and cumulative equity method earnings (losses). As the Company has no explicit or implicit commitment to fund losses at the unconsolidated investments, the Company recorded distributions received in excess of the carrying amount of its unconsolidated investments as gains. For the three and nine months ended September 30, 2019, earnings in unconsolidated investments, net as reported on the consolidated statements of operations attributable to South Kent included $5 million and $10 million, respectively, in distributions received in excess of the carrying amount of the Company's investment.
During the suspension period, the Company maintains a memo ledger that records the components of the suspended activity. As of September 30, 2019, the memo ledger balance was made up of distributions received of $10 million in excess of the carrying amount of the Company's unconsolidated investment in South Kent and earnings of $2 million in excess of the carrying amount.
Basis Amortization of Unconsolidated Investments
The cost of the Company’s investment in the net assets of unconsolidated investments was higher than the fair value of the Company’s equity interest in the underlying net assets of its unconsolidated investments. The basis differences were primarily attributable to property, plant and equipment, PPAs, and equity method goodwill. The Company amortizes the basis difference attributable to property, plant and equipment, and PPAs over their useful life and contractual life, respectively. The Company does not amortize equity method goodwill. For the three and nine months ended September 30, 2019, the Company recorded basis difference amortization for its unconsolidated investments of $2 million and $5 million, respectively, and for the same periods in 2018, the Company recorded basis difference amortization of $3 million and $8 million, respectively, in earnings (loss) 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 and nine months ended September 30, 2019 and 2018 for the Company's equity method investees (in millions). Results for the three and nine months ended September 30, 2019 include Belle River and North Kent, which were acquired in August 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue
|
$
|
47
|
|
|
$
|
65
|
|
|
$
|
208
|
|
|
$
|
245
|
|
Cost of revenue
|
30
|
|
|
29
|
|
|
98
|
|
|
89
|
|
Operating expenses
|
37
|
|
|
20
|
|
|
117
|
|
|
74
|
|
Other expense
|
23
|
|
|
18
|
|
|
73
|
|
|
58
|
|
Net income (loss)
|
$
|
(43
|
)
|
|
$
|
(2
|
)
|
|
$
|
(80
|
)
|
|
$
|
24
|
|
9. Debt
The Company’s debt consists of the following for periods presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Contractual Interest Rate
|
|
Effective Interest Rate
|
|
|
|
|
|
|
|
Maturity
|
Corporate-level
|
|
|
|
|
|
|
|
|
|
Corporate Revolving Credit Facility
|
$
|
39
|
|
|
$
|
198
|
|
|
Varies
|
|
(1)
|
3.70
|
%
|
(1)
|
November 2022
|
Incremental Bank Loan
|
250
|
|
|
—
|
|
|
Varies
|
|
(6)
|
3.41
|
%
|
(6)
|
July 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
|
97
|
|
|
100
|
|
|
4.57
|
%
|
|
4.57
|
%
|
|
September 2033
|
Mont Sainte Marguerite-med term loan
|
60
|
|
|
62
|
|
|
3.97
|
%
|
|
3.97
|
%
|
|
December 2029
|
Mont Sainte Marguerite-long term loan
|
96
|
|
|
93
|
|
|
5.04
|
%
|
|
5.04
|
%
|
|
June 2042
|
Variable interest rate
|
|
|
|
|
|
|
|
|
|
Gulf Wind Promissory Note
|
22
|
|
|
—
|
|
|
2.84
|
%
|
|
2.84
|
%
|
|
December 2019
|
Japan Credit Facility
|
25
|
|
|
25
|
|
|
Varies
|
|
(5)
|
1.82
|
%
|
|
August 2022
|
Ocotillo commercial term loan
|
269
|
|
|
281
|
|
|
3.60
|
%
|
|
4.01
|
%
|
(3)
|
June 2033
|
St. Joseph term loan (2)
|
150
|
|
|
152
|
|
|
3.72
|
%
|
|
4.08
|
%
|
(3)
|
November 2033
|
Western Interconnect term loan
|
90
|
|
|
52
|
|
|
3.49
|
%
|
|
4.21
|
%
|
(3)
|
May 2034
|
Meikle term loan (2)
|
242
|
|
|
239
|
|
|
3.48
|
%
|
|
3.94
|
%
|
(3)
|
May 2024
|
Futtsu term loan
|
73
|
|
|
75
|
|
|
1.07
|
%
|
|
1.86
|
%
|
(3)
|
December 2033
|
Ohorayama term loan
|
92
|
|
|
93
|
|
|
0.87
|
%
|
|
1.50
|
%
|
(3)
|
February 2036
|
Tsugaru Construction Loan
|
276
|
|
|
131
|
|
|
0.72
|
%
|
|
0.72
|
%
|
|
March 2038
|
Tsugaru Holdings Loan Agreement
|
62
|
|
|
59
|
|
|
3.13
|
%
|
|
3.13
|
%
|
|
July 2022
|
Imputed interest rate
|
|
|
|
|
|
|
|
|
|
Hatchet Ridge financing lease obligation
|
172
|
|
|
180
|
|
|
1.43
|
%
|
|
1.43
|
%
|
|
December 2032
|
|
2,590
|
|
|
2,315
|
|
|
|
|
|
|
|
Unamortized discount, net (4)
|
(6
|
)
|
|
(11
|
)
|
|
|
|
|
|
|
Unamortized financing costs
|
(19
|
)
|
|
(21
|
)
|
|
|
|
|
|
|
Total debt, net
|
2,565
|
|
|
2,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reflected on the consolidated balance sheets
|
|
|
|
|
|
|
|
|
|
Revolving credit facility, current
|
$
|
39
|
|
|
$
|
198
|
|
|
|
|
|
|
|
Revolving credit facility
|
25
|
|
|
25
|
|
|
|
|
|
|
|
Current portion of long-term debt, net of financing costs
|
329
|
|
|
56
|
|
|
|
|
|
|
|
Long term debt, net of financing costs
|
2,172
|
|
|
2,004
|
|
|
|
|
|
|
|
Total debt, net
|
$
|
2,565
|
|
|
$
|
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 10, 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.
|
|
|
(6)
|
Refer to Incremental Bank Loan for interest rate details.
|
Interest and commitment fees incurred and interest expense for debt consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Corporate-level interest and commitment fees incurred
|
$
|
11
|
|
|
$
|
10
|
|
|
$
|
33
|
|
|
$
|
28
|
|
Project-level interest and commitment fees incurred
|
13
|
|
|
16
|
|
|
40
|
|
|
47
|
|
Capitalized interest, commitment fees, and letter of credit fees
|
(1
|
)
|
|
(2
|
)
|
|
(4
|
)
|
|
(3
|
)
|
Amortization of debt discount/premium, net
|
2
|
|
|
2
|
|
|
5
|
|
|
4
|
|
Amortization of financing costs
|
2
|
|
|
2
|
|
|
4
|
|
|
5
|
|
Interest expense
|
$
|
27
|
|
|
$
|
28
|
|
|
$
|
78
|
|
|
$
|
81
|
|
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 September 30, 2019, $347 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 September 30, 2019, the Company's holding company subsidiaries were in compliance with covenants contained in the Revolving Credit Facility.
As of September 30, 2019 and December 31, 2018, letters of credit of $54 million and $45 million, respectively, were issued under the Revolving Credit Facility.
Incremental Bank Loan
On July 31, 2019, certain of the Company's subsidiaries entered into Amendment No. 2 to the Revolving Credit Facility (the Amendment). The Amendment provides for the incurrence of an incremental term loan credit facility of $250 million (the Incremental Bank Loan), which the Company incurred upon closing of the Amendment and is in addition to the Revolving Credit Facility. The Incremental Bank Loan has a three-year term and will not amortize. The Incremental Bank Loan is secured by the same collateral as the Revolving Credit Facility on a pari passu basis. Proceeds from the Incremental Bank Loan were used to repay a portion of the Company's Revolving Credit Facility.
The Incremental Bank Loan are base rate loans or Eurodollar rate loans, denominated in U.S. dollars. The base rate loans accrue interest at the fluctuating rate per annum equal to the greater of the (i) U.S. dollar prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate that would be in effect for a Eurodollar rate loan with an interest period of one month plus 1.0%, plus an applicable margin ranging from 0.175% to 0.425% (corresponding to applicable leverage ratios of borrowers). The Eurodollar rate loans accrue interest at a rate per annum equal to LIBOR plus an applicable margin ranging from 1.175% to 1.425% (corresponding to applicable leverage ratios of borrowers).
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 and are presented on the Company's consolidated balance sheets as a component of "Current portion of long-term debt, net." 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):
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31,
2018
|
Principal
|
$
|
225
|
|
|
$
|
225
|
|
Less:
|
|
|
|
Unamortized debt discount
|
(4
|
)
|
|
(8
|
)
|
Unamortized financing costs
|
(1
|
)
|
|
(2
|
)
|
Carrying value of convertible senior notes
|
$
|
220
|
|
|
$
|
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.
|
Project Debt
Gulf Wind Promissory Note
In September 2019, Gulf Wind entered into a non-amortizing short-term bridge loan (Gulf Bridge Loan) of $22 million. The Gulf Bridge Loan matures on or before the earliest to occur of December 31, 2019 or the date additional project financing has been secured. The base rate on the Gulf Bridge Loan is based on LIBOR plus 0.75%.
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 $33 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 September 30, 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 September 30, 2019, outstanding borrowings under the Tsugaru Construction Loan totaled $276 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 September 30, 2019, outstanding borrowings under the Tsugaru Holdings Loan Agreement totaled $62 million.
10. Derivative Instruments
The Company employs a variety of derivative instruments to manage its exposure to fluctuations in electricity prices, interest rates and foreign currency exchange rates. Energy prices are subject to wide swings as supply and demand are impacted by, among many other unpredictable items, weather, market liquidity, generating facility availability, customer usage, storage, and transmission and transportation constraints. Interest rate risk exists primarily on variable-rate debt for which the cash flows vary based upon movement in interest rates. Additionally, the Company is exposed to foreign currency exchange rate risk primarily from its business operations in Canada and 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 September 30, 2019, the Company also had other energy-related contracts that did not meet the definition of a derivative instrument or qualified for the NPNS 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 millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
|
Current
|
|
Long-Term
|
|
Current
|
|
Long-Term
|
Fair Value of Designated Derivatives
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
81
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Undesignated Derivatives
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
3
|
|
|
7
|
|
|
—
|
|
|
—
|
|
Congestion revenue rights (1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Fair Value
|
|
$
|
3
|
|
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
(1)
|
As of September 30, 2019, the fair value was less than $1 million.
|
The following table summarizes the notional amounts of the Company's outstanding derivative instruments (in millions, except for MWh):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit of Measure
|
|
September 30,
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Designated Derivative Instruments
|
|
|
|
|
|
|
Interest rate swaps
|
|
USD
|
|
$
|
346
|
|
|
$
|
319
|
|
Interest rate swaps
|
|
CAD
|
|
$
|
707
|
|
|
$
|
721
|
|
Interest rate swaps
|
|
JPY
|
|
¥
|
54,987
|
|
|
¥
|
55,675
|
|
|
|
|
|
|
|
|
Undesignated Derivative Instruments
|
|
|
|
|
|
|
Interest rate swaps
|
|
USD
|
|
$
|
—
|
|
|
$
|
138
|
|
Energy derivative
|
|
MWh
|
|
—
|
|
|
193,252
|
|
Foreign currency forward contracts
|
|
CAD
|
|
$
|
77
|
|
|
$
|
106
|
|
Foreign currency forward contracts
|
|
JPY
|
|
¥
|
10,691
|
|
|
¥
|
11,589
|
|
Congestion revenue rights
|
|
MWh
|
|
248
|
|
|
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 4.2 years to 23.5 years as of September 30, 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 September 30,
|
|
Nine months ended September 30,
|
|
|
Description
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Gains (losses) recognized in accumulated OCI
|
|
Change in fair value (1)
|
|
$
|
(13
|
)
|
|
$
|
14
|
|
|
$
|
(66
|
)
|
|
$
|
22
|
|
Gains (losses) reclassified from accumulated OCI into:
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
Derivative settlements
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
Gain on derivatives
|
|
De-designation of derivatives
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
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 $6 million in accumulated other loss will be reclassified into earnings over the next twelve months.
Derivatives Not Designated as Hedging Instruments
The following table presents gains and losses on derivatives not designated as hedges (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Statement Line Item
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
Derivative Type
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Interest rate derivatives
|
|
Gain on derivatives
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
4
|
|
Energy derivative
|
|
Electricity sales
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
Foreign currency forward contracts
|
|
Gain on derivatives
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
4
|
|
|
$
|
12
|
|
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 gain on derivatives in the consolidated statements of operations as these hedges are not accounted for under hedge accounting. As of September 30, 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 fixed 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 was approximately 504,220 MWh per year. The energy derivative instrument did not meet the criteria required to adopt hedge accounting. As a result, changes in fair value were recorded in electricity sales in the consolidated statements of operations. The energy derivative expired in April 2019. As a result of the counterparty's credit rating downgrade, the Company received collateral related to the energy derivative agreement. As of September 30, 2019, the Company returned the counterparty's collateral.
In May 2019, the Company secured a short-term derivative instrument to continue to manage its exposure to variable electricity prices at Gulf Wind that expired on September 30, 2019. The short-term derivative instrument qualified for the NPNS scope exception and was accounted for under ASC 606.
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 10.5 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 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 on derivatives in the consolidated statements of operations.
11. 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 2 months to 18 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 September 30, 2019, future sublease proceeds under the sublease agreement are less than $1 million for the remaining three months 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
|
|
September 30, 2019
|
Operating lease right-of-use assets
|
|
Other assets
|
|
$
|
63
|
|
Operating lease liabilities, current
|
|
Other current liabilities
|
|
(10
|
)
|
Operating lease liabilities
|
|
Other long-term liabilities
|
|
(68
|
)
|
Total operating lease liabilities
|
|
|
|
$
|
(78
|
)
|
As of September 30, 2019, maturities of operating lease liabilities were as follows (in millions):
|
|
|
|
|
|
Remainder of 2019
|
|
3
|
|
2020
|
|
9
|
|
2021
|
|
9
|
|
2022
|
|
9
|
|
2023
|
|
9
|
|
Thereafter
|
|
51
|
|
Total lease payment
|
|
$
|
90
|
|
Less imputed interest
|
|
(12
|
)
|
Total
|
|
$
|
78
|
|
The components of lease expense are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2019
|
|
Nine months ended
September 30, 2019
|
Operating lease cost
|
|
$
|
2
|
|
|
$
|
6
|
|
Sublease income
|
|
(1
|
)
|
|
(2
|
)
|
Total lease cost
|
|
$
|
1
|
|
|
$
|
4
|
|
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):
|
|
|
|
|
|
|
|
Nine months ended
September 30, 2019
|
Operating cash flows from operating leases (1)
|
|
$
|
(7
|
)
|
Right of use assets obtained in exchange for new operating lease obligations (2)
|
|
$
|
1
|
|
Weighted average remaining lease term (years):
|
|
11.0
|
|
Weighted average discount rate (3):
|
|
3.24
|
%
|
|
|
(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.
|
|
|
(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 September 30, 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.
12. 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
|
(20
|
)
|
|
21
|
|
|
6
|
|
|
7
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
1
|
|
|
4
|
|
|
5
|
|
Net current period other comprehensive income (loss)
|
(20
|
)
|
|
22
|
|
|
10
|
|
|
12
|
|
Balances at September 30, 2018
|
$
|
(48
|
)
|
|
$
|
18
|
|
|
$
|
17
|
|
|
$
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
10
|
|
|
(59
|
)
|
|
(7
|
)
|
|
(56
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
2
|
|
|
1
|
|
|
3
|
|
Net current period other comprehensive income (loss)
|
10
|
|
|
(57
|
)
|
|
(6
|
)
|
|
(53
|
)
|
Balances at September 30, 2019
|
$
|
(55
|
)
|
|
$
|
(61
|
)
|
|
$
|
3
|
|
|
$
|
(113
|
)
|
13. 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 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
10
|
|
Congestion revenue rights (1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
10
|
|
Liabilities
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
—
|
|
|
$
|
87
|
|
|
$
|
—
|
|
|
$
|
87
|
|
Foreign currency forward contracts (1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
122
|
|
|
122
|
|
|
$
|
—
|
|
|
$
|
87
|
|
|
$
|
122
|
|
|
$
|
209
|
|
|
|
(1)
|
As of September 30, 2019, the fair value was less than $1 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Energy derivative
|
—
|
|
|
—
|
|
|
7
|
|
|
7
|
|
Foreign currency forward contracts
|
—
|
|
|
12
|
|
|
—
|
|
|
12
|
|
Congestion revenue rights
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
8
|
|
|
$
|
23
|
|
Liabilities
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
31
|
|
Foreign currency forward contracts
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
130
|
|
|
130
|
|
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
130
|
|
|
$
|
163
|
|
Level 2 Inputs
Derivative instruments subject to re-measurement are presented in the financial statements at fair value. The Company's interest rate swaps were valued by discounting the net cash flows using the forward LIBOR curve with the valuations adjusted by the Company’s credit default hedge rate. The Company’s foreign currency forward contracts were valued using the income approach based on the present value of the forward rates less the contract rates, multiplied by the notional amounts.
Level 3 Inputs
Energy Hedge
The fair value of the energy derivative instrument is determined based on a third-party valuation model. The methodology and inputs were evaluated by management for consistency and reasonableness by comparing inputs used by the third-party valuation provider to another third-party pricing service for identical or similar instruments and also reconciling inputs used in the third-party valuation model to the derivative contract for accuracy. Any significant changes were further evaluated for reasonableness by obtaining additional documentation from the third-party valuation provider.
The energy derivative instrument was valued by discounting the projected net cash flows over the remaining life of the derivative instrument using future electricity price curves with little or no market activity. Significant increases or decreases in this input would result in a significantly lower or higher fair value measurement. The energy derivative instrument expired in April 2019 and was replaced with a secured short-term derivative that qualified for the NPNS scope exception and expired on September 30, 2019.
The following table presents a reconciliation of the energy derivative instrument measured at fair value on a recurring basis using significant unobservable inputs (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
Energy Derivative
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Balances, beginning of period
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
7
|
|
|
$
|
27
|
|
Total gain (loss) included in electricity sales
|
|
—
|
|
|
2
|
|
|
1
|
|
|
(2
|
)
|
Settlements
|
|
—
|
|
|
(2
|
)
|
|
(8
|
)
|
|
(13
|
)
|
Balances, end of period
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
During the three and nine months ended September 30, 2019, the Company recognized unrealized losses of $0 million and $7 million, respectively, and $0 million and $15 million for the same periods in 2018, respectively, relating to the energy derivative instrument which were recorded to electricity sales on the consolidated statements of operations.
Contingent Consideration
As part of the Japan Acquisition, the Company is required to pay an additional earn-out of $118 million, which may be increased by $10 million if the final Tsugaru cost is less than or equal to the construction budget or may be decreased by $10 million if the final Tsugaru cost is greater than the construction budget, upon term conversion of the Tsugaru Construction Loan. The discounted fair value of the contingent consideration at the acquisition date was $103 million, subject to foreign currency exchange rate changes. In September 2019, the Company received a revised construction budget reflecting lower final construction costs than the original construction budget. Per the terms of the Japan Acquisition, to the extent construction costs are lower than budgeted, the contingent consideration will increase. As a result of the revised lower construction budget, an additional $10 million earn-out payment is due upon term conversion. The Company recorded $9 million as development expense for the three months ended September 30, 2019, with the additional $1 million to be recognized over the remaining construction period.
The Broadview Project acquisition includes contingent consideration, which requires the Company to make an additional payment upon the commercial operation of Grady, which occurred in August 2019. The contingent post-closing payment reflects the fair value of the Company's interest in the increase in the projected 25-year transmission wheeling revenue Western Interconnect will receive from Grady, adjusted for the estimated production loss incurred by Broadview due to wake effects and transmission losses induced by the operation of Grady. The fair value of the contingent consideration at the acquisition date was $21 million. Pursuant to the Fourth Amendment to the Purchase and Sale Agreement for the Broadview Project acquisition, the Company paid $25 million in contingent consideration in May 2019 to Pattern Energy Group LP, subject to a final adjustment. The Company recorded
an additional estimate of $4 million as development expense for the three months ended September 30, 2019 based on the expected final contingent consideration amount.
The estimated fair value of the contingent considerations were calculated by using a discounted cash flow technique which utilized unobservable inputs. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820, Fair Value Measurement. As of September 30, 2019, there were no significant changes in these unobservable inputs that may result in significant changes in fair value.
The following table presents a reconciliation of the contingent consideration liabilities measured at fair value on a recurring basis using significant unobservable inputs (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
Contingent Consideration Liabilities
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Balances, beginning of period
|
|
$
|
111
|
|
|
$
|
128
|
|
|
130
|
|
|
$
|
22
|
|
Purchase
|
|
—
|
|
|
—
|
|
|
—
|
|
|
106
|
|
Total loss included in development expenses
|
|
9
|
|
|
—
|
|
|
9
|
|
|
—
|
|
Total loss included in other expense, net
|
|
2
|
|
|
2
|
|
|
6
|
|
|
7
|
|
Foreign currency translation adjustments recognized in accumulated OCI
|
|
—
|
|
|
(2
|
)
|
|
2
|
|
|
(7
|
)
|
Settlement
|
|
—
|
|
|
(3
|
)
|
|
(25
|
)
|
|
(3
|
)
|
Balances, end of period
|
|
$
|
122
|
|
|
$
|
125
|
|
|
$
|
122
|
|
|
$
|
125
|
|
During the three and nine months ended September 30, 2019, the Company recognized unrealized losses of $2 million and $6 million, respectively, and during the three and nine months ended September 30, 2018, the Company recognized unrealized losses of $2 million and $7 million, respectively, relating to contingent liabilities which was recorded to other expense, net on the consolidated statements of operations.
The valuation techniques and significant unobservable inputs used in material recurring Level 3 fair value measurements were as follows (in millions, for fair value):
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Fair Value
|
|
Valuation Technique
|
|
Significant Unobservable Inputs
|
|
Range
|
Tsugaru contingent consideration
|
|
$122
|
|
Discounted cash flow
|
|
Deferred purchase price
|
|
$109 - $128 million
|
|
|
|
|
|
|
Discount rate
|
|
6.90%
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Fair Value
|
|
Valuation Technique
|
|
Significant Unobservable Inputs
|
|
Range
|
Energy derivative
|
|
$7
|
|
Discounted cash flow
|
|
Forward electricity prices
|
|
$20.02-$32.58 (1)
|
|
|
|
|
|
|
Discount rate
|
|
2.80%-2.81%
|
|
|
|
|
|
|
|
|
|
Broadview contingent consideration
|
|
$25
|
|
Discounted cash flow
|
|
Discount rate
|
|
4.0%-8.0%
|
|
|
|
|
|
|
Annual energy production loss
|
|
0.70%
|
|
|
|
|
|
|
|
|
|
Tsugaru contingent consideration
|
|
$105
|
|
Discounted cash flow
|
|
Deferred purchase price
|
|
$109 - $128 million
|
|
|
|
|
|
|
Discount rate
|
|
6.90%
|
|
|
(1)
|
Represents price per MWh.
|
Financial Instruments Not Measured at Fair Value
The following table presents the carrying amount and fair value and the fair value hierarchy of the Company’s financial liabilities that are not measured at fair value in the consolidated balance sheets, but for which fair value is disclosed (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
As reflected on the balance sheet
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
Total debt, net
|
$
|
2,565
|
|
|
$
|
—
|
|
|
$
|
2,584
|
|
|
$
|
—
|
|
|
$
|
2,584
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
Total debt, net
|
$
|
2,283
|
|
|
$
|
—
|
|
|
$
|
2,240
|
|
|
$
|
—
|
|
|
$
|
2,240
|
|
Long-term debt is presented on the consolidated balance sheets, net of financing costs, discounts and premiums. The fair value of variable interest rate long-term debt is approximated by its carrying cost. The fair value of fixed interest rate long-term debt is estimated based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied, using the net present value of cash flow streams over the term using estimated market rates for similar instruments and remaining terms.
14. Stockholders' Equity
Common Stock
The Company has an equity distribution agreement (Equity Distribution Agreement) pursuant to the terms of which, the Company may offer and sell shares of the Company's Class A common stock, par value $0.01 per share, from time to time, up to an aggregate sales price of $200 million. For the nine months ended September 30, 2019, the Company did not sell any shares under the Equity Distribution Agreement. As of September 30, 2019, approximately $144 million in aggregate offering price remained available to be sold under the agreement.
Noncontrolling Interests
The following table presents the balances for noncontrolling interests by project (in millions):
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2019
|
|
2018
|
Logan's Gap
|
$
|
123
|
|
|
$
|
132
|
|
Panhandle 1
|
118
|
|
|
131
|
|
Panhandle 2
|
162
|
|
|
176
|
|
Post Rock
|
101
|
|
|
116
|
|
Amazon Wind
|
92
|
|
|
101
|
|
Broadview Project
|
243
|
|
|
257
|
|
Futtsu
|
9
|
|
|
10
|
|
Meikle
|
44
|
|
|
57
|
|
MSM
|
38
|
|
|
37
|
|
Stillwater
|
92
|
|
|
95
|
|
Belle River
|
18
|
|
|
—
|
|
Noncontrolling interest
|
$
|
1,040
|
|
|
$
|
1,112
|
|
The following table presents the components of total noncontrolling interest as reported in the stockholders’ equity statements and the consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
Accumulated Loss
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Noncontrolling Interest
|
Balances at December 31, 2017
|
$
|
1,380
|
|
|
$
|
(126
|
)
|
|
$
|
—
|
|
|
$
|
1,254
|
|
Acquisitions
|
52
|
|
|
—
|
|
|
—
|
|
|
52
|
|
Sale of subsidiaries
|
(37
|
)
|
|
5
|
|
|
—
|
|
|
(32
|
)
|
Distributions to noncontrolling interests
|
(29
|
)
|
|
—
|
|
|
—
|
|
|
(29
|
)
|
Net loss (1)
|
—
|
|
|
(202
|
)
|
|
—
|
|
|
(202
|
)
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Balances at September 30, 2018
|
$
|
1,366
|
|
|
$
|
(323
|
)
|
|
$
|
2
|
|
|
$
|
1,045
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2018
|
$
|
1,452
|
|
|
$
|
(332
|
)
|
|
$
|
(8
|
)
|
|
$
|
1,112
|
|
Contributions from noncontrolling interests
|
24
|
|
|
—
|
|
|
—
|
|
|
24
|
|
Distributions to noncontrolling interests
|
(33
|
)
|
|
—
|
|
|
—
|
|
|
(33
|
)
|
Net loss
|
—
|
|
|
(59
|
)
|
|
—
|
|
|
(59
|
)
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
(4
|
)
|
Balances at September 30, 2019
|
$
|
1,443
|
|
|
$
|
(391
|
)
|
|
$
|
(12
|
)
|
|
$
|
1,040
|
|
|
|
(1)
|
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law, which enacted major changes to the U.S. federal income tax laws, including a permanent reduction in the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. Reduction in the corporate income tax rate resulted in one-time reduction in the noncontrolling interest attributable to partners in its tax equity partnerships. As part of the liquidation waterfall, the Company allocated significantly lower portions of the hypothetical liquidation proceeds to compensate certain noncontrolling interest investors for tax gains on the hypothetical sale calculated at the lowered rate of 21% as compared to the rate of 35% that was previously utilized. For the nine months ended September 30, 2018, included in net loss attributable to noncontrolling interest is a one-time adjustment of $150 million as a result of the decrease in the federal corporate income tax rate.
|
Pay-go Contribution
For the Broadview Project, there is a partial pay as you go (Pay-go) funding arrangement under which, when the actual annual MWh production of Broadview exceeds a certain production threshold, the tax equity investors are obligated to make a cash contribution ("Pay-go contribution") to the Company. The Pay-go arrangement resulted in a lower initial investment by the tax equity investors and provided them with some protection from potential underperformance of Broadview. For the year ended December 31, 2018, the actual MWh production of Broadview exceeded the production threshold. As a result, the Company received $5 million of Pay-go contribution from the tax equity investors in the first quarter of 2019.
15. Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) is computed by dividing net earnings (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the reportable period. Diluted EPS is computed by adjusting basic EPS for the effect of all potential common shares unless they are anti-dilutive. For purpose of this calculation, potentially dilutive securities are determined by applying the treasury stock method to the assumed exercise of in-the-money stock options and the assumed vesting of outstanding restricted stock awards (RSAs) and release of deferred restricted stock units (RSUs). Potentially dilutive securities related to convertible senior notes are determined using the if-converted method.
The Company's vested deferred RSUs have non-forfeitable rights to dividends prior to release and are considered participating securities. Accordingly, they are included in the computation of basic and diluted EPS, pursuant to the two-class method; however, due to amounts being below $1 million dollars, they are not shown in the table below. Under the two-class method, distributed and undistributed earnings allocated to participating securities are excluded from net earnings (loss) attributable to common stockholders for purposes of calculating basic and diluted EPS. However, net losses are not allocated to participating securities since they are not contractually obligated to share in the losses of the Company.
Potentially dilutive securities excluded from the calculation of diluted EPS because their effect would have been anti-dilutive were 9 million and 9 million shares, respectively, for the three and nine months ended September 30, 2019, and 9 million shares and less than 1 million shares, respectively, for the three and nine months ended September 30, 2018.
The computations for Class A basic and diluted EPS are as follows (in millions, except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator for basic and diluted EPS:
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to controlling interest
|
$
|
(51
|
)
|
|
$
|
(13
|
)
|
|
$
|
(88
|
)
|
|
$
|
156
|
|
Numerator for basic EPS - net income (loss) attributable to common stockholders
|
$
|
(51
|
)
|
|
$
|
(13
|
)
|
|
$
|
(88
|
)
|
|
$
|
156
|
|
Add back convertible senior notes interest
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Numerator for diluted EPS - net income (loss) attributable to common stockholders
|
$
|
(51
|
)
|
|
$
|
(13
|
)
|
|
$
|
(88
|
)
|
|
$
|
167
|
|
|
|
|
|
|
|
|
|
Denominator for EPS:
|
|
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
Class A common stock - basic
|
97,600,393
|
|
|
97,460,492
|
|
|
97,595,765
|
|
|
97,464,012
|
|
Add dilutive effect of:
|
|
|
|
|
|
|
|
Restricted stock awards
|
—
|
|
|
—
|
|
|
—
|
|
|
153,444
|
|
Restricted stock units
|
—
|
|
|
—
|
|
|
—
|
|
|
652
|
|
Convertible senior notes
|
—
|
|
|
—
|
|
|
—
|
|
|
8,170,740
|
|
Class A common stock - diluted
|
97,600,393
|
|
|
97,460,492
|
|
|
97,595,765
|
|
|
105,788,848
|
|
|
|
|
|
|
|
|
|
EPS:
|
|
|
|
|
|
|
|
Class A common stock:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.53
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
1.60
|
|
Diluted
|
$
|
(0.53
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
1.58
|
|
|
|
|
|
|
|
|
|
Dividends declared per Class A common share
|
$
|
0.42
|
|
|
$
|
0.42
|
|
|
$
|
1.27
|
|
|
$
|
1.27
|
|
16. Commitments and Contingencies
Land Agreements Not Accounted for under ASC 842
The Company has entered into various long-term land agreements for its wind and solar farms that are not accounted for under ASC 842, primarily in the U.S. and Canada, because the agreements do not convey the right to control the use of the land. In these agreements, the Company does not have exclusive use of the land and the landowners retain the rights to the economic benefits for most of the land. For the three and nine months ended September 30, 2019, the Company recorded rent expenses of $4 million and $12 million, respectively, and $4 million and $13 million for the same periods in 2018, respectively, in project expense in its consolidated statements of operations.
Letters of Credit
Power Sale Agreements
The Company owns and operates wind and solar power projects and has entered into various long-term PSAs that terminate from 2019 to 2043. The terms of these agreements generally provide for the annual delivery of a minimum amount of electricity at fixed prices and in some cases include price escalation over the term of the agreement. Under the terms of these agreements, as of September 30, 2019, irrevocable letters of credits totaling $153 million were available to be issued to guarantee the Company's performance for the duration of the agreements.
Project Finance and Other Agreements
The Company has various project finance and other agreements which obligate the Company to provide certain reserves to enhance its credit worthiness and facilitate the availability of credit. As of September 30, 2019, irrevocable letters of credit totaling $161 million, which includes letters of credit available under the Revolving Credit Facility, were available to be issued to ensure performance under the various project finance and other agreements.
Contingencies
Turbine Operating Warranties and Service Guarantees
The Company has various turbine availability warranties from its turbine manufacturers and service guarantees from its service and maintenance providers. Pursuant to these guarantees, if a turbine operates at less than minimum availability during the guarantee measurement period, the service provider is obligated to pay, as liquidated damages at the end of the warranty measurement period, an amount for each percent that the turbine operates below the minimum availability threshold. In addition, pursuant to certain of these guarantees, if a turbine operates at more than a specified availability during the guarantee measurement period, the Company has an obligation to pay a bonus to the service provider at the end of the warranty measurement period. As of September 30, 2019, the Company recorded liabilities of $2 million associated with bonuses payable to the turbine manufacturers and service providers.
Contingencies in connection with the Broadview Project
The Company recorded a $7 million contingent obligation, payable to a third party who holds a 1% interest in Western Interconnect, at fair value upon the acquisition of the Broadview Project. These contingent payments are subject to certain conditions, including the actual energy production of Broadview in a production year and the continued operation of Broadview. Additionally, the Company initially recorded a $29 million contingent obligation, payable to the same counterparty, at fair value using a discount rate of approximately 5% upon acquisition of the Broadview Project. The undiscounted contingent obligation is estimated to be approximately $50 million and is expected to be paid over the life of the PSA term. These contingent payments are subject to certain conditions, including the commercial operation of Grady. The contingent payment is calculated as a percentage of additional transmission revenue earned by Western Interconnect upon Grady's commercial operation, which occurred in August 2019. As of September 30, 2019, the Company has paid approximately $1 million.
Contingencies in connection with the Sale of Panhandle 2 interests
In connection with the sale of Panhandle 2, the Company agreed to indemnify PSP Investments up to $5 million to cover PSP Investments' pro rata share of the economic impacts resulting from planned transmission outages in the Texas market until December 31, 2019. As of September 30, 2019, the Company has recorded a contingent liability of $4 million associated with the indemnity.
Contingencies in connection with Hatchet Ridge
On January 29, 2019, Pacific Gas and Electric Company (PG&E) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of California ("the Bankruptcy Court"). The Company has received all post-petition invoiced amounts through September 2019. However, the pre-petition amount of $2 million that relates to production prior to the Chapter 11 filing date remained outstanding as of September 30, 2019 and will be addressed as part of Chapter 11 process. The Company determined that it is probable that substantially all of the consideration to which the entity will be entitled for the electricity delivered to PG&E will be collected; therefore, the Company continues to account for the PSA under ASC 606. The Company evaluated the pre-petition amount of $2 million for impairment in accordance with ASC 450, Contingencies. The Company concluded that it is reasonably possible that Hatchet Ridge's pre-petition amount may be impaired; however, the Company did not recognize any amount for impairment for the nine months ended September 30, 2019. The Company will continue to monitor the bankruptcy proceedings and reassess the pre-petition amount for impairment.
Legal Matters
From time to time, the Company has become involved in claims and legal matters arising in the ordinary course of business. Management is not currently aware of any matters that will have a material adverse effect on the financial position, results of operations, or cash flows of the Company.
Indemnity
The Company also enters into indemnity agreements in the ordinary course of business with surety bond providers that issue surety bonds to contractual counterparties in connection with the decommissioning projects and other performance obligations. Pursuant to the indemnity agreements, the Company is obligated, on a joint and several basis with the project company, to indemnify the surety in the event of a draw by the beneficiary. The indemnity obligation is limited to the amount of the bonds and certain related costs and expenses.
17. Related Party Transactions
Management Fees
The Company provides management services and receives a fee for such services under agreements with its joint venture investees, Belle River, North Kent, South Kent, Grand, and Armow, in addition to various Pattern Energy Group LP subsidiaries and equity method investments. In connection with the Japan Acquisition, the Company receives management services related to the acquired projects and incurs a fee for such services under agreements with a subsidiary of Pattern Development.
Management Services Agreement and Shared Management
The Company has entered into a MSA with the Pattern Development Companies, which provides for the Company and the Pattern Development Companies to benefit, primarily on a cost-reimbursement basis, from the parties’ respective management and other professional, technical and administrative personnel, all of whom report to the Company’s executive officers. Costs and expenses incurred at the Pattern Development Companies or their respective subsidiaries on the Company's behalf will be allocated to the Company. Conversely, costs and expenses incurred at the Company or its respective subsidiaries on the behalf of a Pattern Development Company will be allocated to the respective Pattern Development Company.
Pursuant to the MSA, certain of the Company’s executive officers, including its Chief Executive Officer (shared PEG executives), also serve as executive officers of the Pattern Development Companies and devote their time to both the Company and the Pattern Development Companies as is prudent in carrying out their executive responsibilities and fiduciary duties. The shared PEG executives have responsibilities for both the Company and the respective Pattern Development Companies and, as a result, these individuals do not devote all of their time to the Company’s business. Under the terms of the MSA, each of the respective Pattern Development Companies is required to reimburse the Company for an allocation of the compensation paid to such shared PEG executives reflecting the percentage of time spent providing services to such Pattern Development Company. The MSA costs incurred by the Company are included in related party general and administrative on the consolidated statements of operations.
Related Party Transactions
The table below presents amounts due from and to related parties as included in the consolidated balance sheets for the following periods (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Other current assets
|
|
$
|
11
|
|
|
$
|
7
|
|
Total due from related parties
|
|
$
|
11
|
|
|
$
|
7
|
|
|
|
|
|
|
Other current liabilities
|
|
13
|
|
|
9
|
|
Contingent liabilities, current
|
|
122
|
|
|
25
|
|
Contingent liabilities
|
|
—
|
|
|
105
|
|
Total due to related parties
|
|
$
|
135
|
|
|
$
|
139
|
|
The table below presents revenue, reimbursement and (expenses) recognized for management services and under the MSA, as included in the statements of operations for the following periods (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
Related Party Agreement
|
|
Financial Statement Line Item
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Management fees
|
|
Other revenue
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
8
|
|
|
$
|
7
|
|
Management fees
|
|
Project expense
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
MSA reimbursement
|
|
General and administrative
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
7
|
|
|
$
|
7
|
|
MSA costs
|
|
Related party general and administrative
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
|
$
|
(12
|
)
|
|
$
|
(12
|
)
|
Purchase and Sales Agreements
During the nine months ended September 30, 2019 and 2018, the Company consummated the following acquisitions with Pattern Energy Group LP, which are further detailed in Note 5, Acquisitions and Note 8, Unconsolidated Investments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions from Pattern Development Companies
|
|
Date of Acquisition
|
|
Cash consideration net of acquired cash
|
|
Debt Assumed
|
|
Contingent Consideration
|
Japan projects
|
|
March 7, 2018
|
|
$
|
158
|
|
|
$
|
181
|
|
|
$
|
106
|
|
MSM
|
|
August 10, 2018
|
|
$
|
31
|
|
|
$
|
196
|
|
|
$
|
—
|
|
Belle River
|
|
August 2, 2019
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
—
|
|
North Kent
|
|
August 2, 2019
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment in Pattern Development
During 2019, the Company funded $7 million into Pattern Development. As of September 30, 2019, the Company has funded $190 million in aggregate and holds an approximately 29% ownership interest in Pattern Development.
ERP Purchase from Pattern Energy Group LP
On March 26, 2019, the Company entered into an Intellectual Property Rights Purchase and Transfer Agreement with Pattern Energy Group LP, pursuant to which the Company acquired certain intellectual property assets which comprise the enterprise resource planning system and associated integrated platforms developed by Pattern Energy Group LP, on a third-party software platform for a purchase price of $13 million. In addition, the Company intends to bill both Pattern Energy Group LP and Pattern Development for their usage under the MSA.
18. Segment Reporting
The Company defines its operating segments to reflect the manner in which the Company's chief operating decision maker, the chief executive officer, evaluates performance and allocates resources in managing the business. The Company evaluates its operations in two reportable segments: (i) the operating business segment, which is comprised of the portfolio of renewable energy power projects and (ii) the development investment, which consists of the Company's investment in Pattern Development. The operating business segment is engaged in the sale of energy from the power projects. The development investment segment develops and sells renewable energy projects and consists solely of the Company's proportional share of its investment in Pattern Development. Corporate, other and eliminations includes operating companies that provide services to the Company's renewable energy power projects, various Pattern Energy Group LP subsidiaries, and Pattern Development and its equity losses in Pattern Development, and is presented to reconcile to the consolidated financial statements.
The chief operating decision maker evaluates segment performance based on segment Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). The Company defines Adjusted EBITDA as net income (loss) before net interest expense, income taxes, and depreciation, amortization and accretion, including its proportionate share of net income (loss) before interest expense, income taxes, and depreciation, amortization and accretion of unconsolidated investments. Adjusted EBITDA also excludes the effect of certain mark-to-market adjustments, gain or loss related to acquisitions, divestitures, or refinancing transactions, adjustments from unconsolidated investments, and infrequent items not related to normal or ongoing operations. In
calculating Adjusted EBITDA, the Company excludes mark-to-market adjustments to the value of the Company's derivatives because the Company believes that it is useful for investors to understand, as a supplement to net income (loss) and other traditional measures of operating results, the results of the Company's operations without regard to periodic, and sometimes material, fluctuations in the market value of such assets or liabilities.
Segment information for the three and nine months ended September 30, 2019 and 2018, respectively, is presented in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2019
|
|
|
Operating Business
|
|
Development Investment (1)
|
|
Corporate, Other and Eliminations
|
|
Reconciling Amounts (2)
|
|
Consolidated
|
Total revenue
|
|
$
|
116
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
(2
|
)
|
|
$
|
119
|
|
Depreciation, amortization and accretion
|
|
$
|
76
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
76
|
|
Operating income (loss)
|
|
$
|
(18
|
)
|
|
$
|
(10
|
)
|
|
$
|
(14
|
)
|
|
$
|
10
|
|
|
$
|
(32
|
)
|
Earnings (loss) in unconsolidated investments (3)
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
(12
|
)
|
|
$
|
—
|
|
|
$
|
(10
|
)
|
Interest expense
|
|
$
|
14
|
|
|
$
|
1
|
|
|
$
|
13
|
|
|
$
|
(1
|
)
|
|
$
|
27
|
|
Income tax provision
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Net income (loss)
|
|
$
|
(31
|
)
|
|
$
|
(11
|
)
|
|
$
|
(40
|
)
|
|
$
|
11
|
|
|
$
|
(71
|
)
|
Adjusted EBITDA
|
|
$
|
86
|
|
|
$
|
(10
|
)
|
|
$
|
(21
|
)
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(95
|
)
|
|
$
|
(54
|
)
|
|
$
|
(1
|
)
|
|
$
|
54
|
|
|
$
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
3,853
|
|
|
$
|
86
|
|
|
$
|
64
|
|
|
$
|
(86
|
)
|
|
$
|
3,917
|
|
Unconsolidated investments
|
|
$
|
296
|
|
|
$
|
10
|
|
|
$
|
(15
|
)
|
|
$
|
(10
|
)
|
|
$
|
281
|
|
Total assets
|
|
$
|
8,892
|
|
|
$
|
205
|
|
|
$
|
(3,496
|
)
|
|
$
|
(205
|
)
|
|
$
|
5,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2019
|
|
|
Operating Business
|
|
Development Investment (1)
|
|
Corporate, Other and Eliminations
|
|
Reconciling Amounts (2)
|
|
Consolidated
|
Total revenue
|
|
$
|
387
|
|
|
$
|
15
|
|
|
$
|
7
|
|
|
$
|
(15
|
)
|
|
$
|
394
|
|
Depreciation, amortization and accretion
|
|
$
|
234
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
$
|
236
|
|
Impairment expense
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
Operating income (loss)
|
|
$
|
1
|
|
|
$
|
(30
|
)
|
|
$
|
(40
|
)
|
|
$
|
30
|
|
|
$
|
(39
|
)
|
Earnings (loss) in unconsolidated investments (3)
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
(31
|
)
|
|
$
|
—
|
|
|
$
|
(16
|
)
|
Interest expense
|
|
$
|
41
|
|
|
$
|
1
|
|
|
$
|
37
|
|
|
$
|
(1
|
)
|
|
$
|
78
|
|
Income tax provision
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
9
|
|
Net income (loss)
|
|
$
|
(34
|
)
|
|
$
|
(30
|
)
|
|
$
|
(113
|
)
|
|
$
|
30
|
|
|
$
|
(147
|
)
|
Adjusted EBITDA
|
|
$
|
311
|
|
|
$
|
(29
|
)
|
|
$
|
(46
|
)
|
|
$
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(155
|
)
|
|
$
|
(56
|
)
|
|
$
|
(4
|
)
|
|
$
|
56
|
|
|
$
|
(159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2018
|
|
|
Operating Business
|
|
Development Investment (1)
|
|
Corporate, Other and Eliminations
|
|
Reconciling Amounts (2)
|
|
Consolidated
|
Total revenue
|
|
$
|
116
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
(4
|
)
|
|
$
|
118
|
|
Depreciation, amortization and accretion
|
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
56
|
|
Impairment expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Operating income (loss)
|
|
$
|
17
|
|
|
$
|
(1
|
)
|
|
$
|
(13
|
)
|
|
$
|
1
|
|
|
$
|
4
|
|
Earnings (loss) in unconsolidated investments (3)
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
Interest expense
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
28
|
|
Income tax provision
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
3
|
|
Net income (loss)
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
(30
|
)
|
|
$
|
2
|
|
|
$
|
(31
|
)
|
Adjusted EBITDA
|
|
$
|
86
|
|
|
$
|
(1
|
)
|
|
$
|
(6
|
)
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(40
|
)
|
|
$
|
(24
|
)
|
|
$
|
(3
|
)
|
|
$
|
24
|
|
|
$
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
4,044
|
|
|
$
|
2
|
|
|
$
|
66
|
|
|
$
|
(2
|
)
|
|
$
|
4,110
|
|
Unconsolidated investments
|
|
$
|
346
|
|
|
$
|
8
|
|
|
$
|
26
|
|
|
$
|
(8
|
)
|
|
$
|
372
|
|
Total assets
|
|
$
|
8,992
|
|
|
$
|
151
|
|
|
$
|
(3,620
|
)
|
|
$
|
(151
|
)
|
|
$
|
5,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2018
|
|
|
Operating Business
|
|
Development Investment (1)
|
|
Corporate, Other and Eliminations
|
|
Reconciling Amounts (2)
|
|
Consolidated
|
Total revenue
|
|
$
|
363
|
|
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
(4
|
)
|
|
$
|
370
|
|
Depreciation, amortization and accretion
|
|
$
|
163
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
166
|
|
Impairment expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
7
|
|
Operating income (loss)
|
|
$
|
62
|
|
|
$
|
(13
|
)
|
|
$
|
(32
|
)
|
|
$
|
13
|
|
|
$
|
30
|
|
Earnings (loss) in unconsolidated investments (3)
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
(17
|
)
|
|
$
|
—
|
|
|
$
|
13
|
|
Interest expense
|
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
81
|
|
Income tax provision
|
|
$
|
6
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
(1
|
)
|
|
$
|
14
|
|
Net income (loss)
|
|
$
|
40
|
|
|
$
|
(14
|
)
|
|
$
|
(86
|
)
|
|
$
|
14
|
|
|
$
|
(46
|
)
|
Adjusted EBITDA
|
|
$
|
294
|
|
|
$
|
(13
|
)
|
|
$
|
(2
|
)
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(124
|
)
|
|
$
|
(31
|
)
|
|
$
|
(5
|
)
|
|
$
|
31
|
|
|
$
|
(129
|
)
|
|
|
(1)
|
Amounts represent the Company's proportionate share in Pattern Development. The Company's proportionate share of revenue in Pattern Development for each of the three and nine months ended September 30, 2019 includes amounts from the sale of a development project to a third-party and electricity sales.
|
|
|
(2)
|
The Company accounts for its investment in Pattern Development under the equity method. Therefore, the reconciling amounts are presented to eliminate Pattern Development and to reconcile to the consolidated totals.
|
|
|
(3)
|
Included in Corporate, Other and Eliminations is a $11 million loss and a $30 million loss for the three and nine months ended September 30, 2019, respectively, related to the Company's portion of the loss of Pattern Development and the elimination of intra entity profits of approximately $1 million. Included in Corporate, Other and Eliminations is a $2 million loss and a $14 million loss for the three and nine months ended September 30, 2018, respectively, related to the Company's portion of the loss of Pattern Development and the elimination of intra entity profits of approximately $3 million.
|
Reconciliation of segment Adjusted EBITDA to the Company's consolidated net loss is presented as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Operating Business Adjusted EBITDA
|
|
$
|
86
|
|
|
$
|
86
|
|
|
$
|
311
|
|
|
$
|
294
|
|
Development Investment Adjusted EBITDA
|
|
(10
|
)
|
|
(1
|
)
|
|
(29
|
)
|
|
(13
|
)
|
Corporate, Other and Eliminations Adjusted EBITDA
|
|
(21
|
)
|
|
(6
|
)
|
|
(46
|
)
|
|
(2
|
)
|
Reconciling Amounts Adjusted EBITDA
|
|
10
|
|
|
1
|
|
|
29
|
|
|
13
|
|
Less, proportionate share from unconsolidated investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net of interest income
|
|
(9
|
)
|
|
(9
|
)
|
|
(21
|
)
|
|
(28
|
)
|
Income tax provision
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Depreciation, amortization and accretion
|
|
(8
|
)
|
|
(8
|
)
|
|
(21
|
)
|
|
(26
|
)
|
Gain (loss) on derivatives
|
|
(1
|
)
|
|
4
|
|
|
(13
|
)
|
|
7
|
|
Unrealized gain (loss) on derivatives
|
|
2
|
|
|
1
|
|
|
(8
|
)
|
|
1
|
|
Impairment expense
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
(7
|
)
|
Adjustments for unconsolidated investments
|
|
5
|
|
|
—
|
|
|
8
|
|
|
—
|
|
Other
|
|
(13
|
)
|
|
(1
|
)
|
|
(15
|
)
|
|
(2
|
)
|
Interest expense, net of interest income
|
|
(26
|
)
|
|
(28
|
)
|
|
(76
|
)
|
|
(80
|
)
|
Depreciation, amortization and accretion
|
|
(85
|
)
|
|
(63
|
)
|
|
(257
|
)
|
|
(188
|
)
|
Net loss before income tax
|
|
(70
|
)
|
|
(28
|
)
|
|
(138
|
)
|
|
(32
|
)
|
Income tax provision
|
|
(1
|
)
|
|
(3
|
)
|
|
(9
|
)
|
|
(14
|
)
|
Net loss
|
|
$
|
(71
|
)
|
|
$
|
(31
|
)
|
|
$
|
(147
|
)
|
|
$
|
(46
|
)
|
19. Subsequent Events
On November 3, 2019, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with Pacific US Inc. (Parent), a Delaware corporation which is an indirect wholly-owned subsidiary of Canada Pension Plan Investment Board (CPP Investments), and with Pacific BidCo US Inc. (BidCo), a Delaware corporation and a wholly-owned subsidiary of Parent, pursuant to which Parent has agreed to acquire the Company for $26.75 per share in an all-cash transaction. The transaction is expected to close by the second quarter of 2020, subject to certain conditions, including regulatory, shareholder and other related approvals. CPP Investment Board Private Holdings (4) Inc. has provided to the Company a limited guarantee of certain obligations of Parent under the Merger Agreement. The Company has incurred transaction-related costs of approximately $3.0 million and $4.8 million for the three and nine months ended September 30, 2019, respectively as a result of the Merger Agreement.
On October 31, 2019, the Company declared an aggregate dividend for the fourth quarter, payable on January 31, 2020, to holders of record on January 15, 2020 of $3.9 million on the shares of Series A Preferred Stock.
On October 31, 2019, the Company declared a dividend for the fourth quarter, payable on January 31, 2020, to holders of record on December 31, 2019, in the amount of $0.4220 per Class A share, or $1.688 on an annualized basis. This is unchanged from the third quarter of 2019.
In October 2019, the Company consummated the purchase of 101 MW of owned capacity in Grady, a 220 MW Pattern Development project located in Curry County, New Mexico, for total cash consideration of approximately $100 million.
In October 2019, the Company consummated the purchase of 150 MW of owned capacity in Henvey Inlet, a 300 MW Pattern Energy Group LP project located in Henvey Inlet First Nation Reserve No. 2 Lands, Ontario, Canada. Following purchase price adjustments to be made at term conversion, the estimated economic cost to the Company will be approximately $193 million.
In October 2019, the Company consummated an earnout acquisition agreement with Pattern Energy Group LP to acquire 100% of Pattern Energy Group LP's earnout rights in certain transmission and wind projects under development, which represent 25% of the profits interest in such projects, for a purchase price of $10 million.
In October 2019, the Company issued 10.4 million shares of Series A Perpetual Preferred Stock with a par value of $260 million at a 1.5% discount (Preferred Shares). The Preferred Shares are entitled to receive, when declared by the board of directors, cumulative cash dividends at an initial annual rate of 5.625%, based on the $25.00 per share liquidation preference. The annual
dividend rate shall increase by 0.5% every year starting on the third anniversary of issuance date to a maximum of four escalations, or 7.625%. The Preferred Shares are entitled to receive 12.6% of any cash distributions, including the return of capital, made by Pattern Development to the Company or any of its subsidiaries not to exceed $3.25 per Preferred Share. The Company received net proceeds of $256 million which it used to fund the acquisition of Henvey Inlet, partially repay borrowings under the revolving credit facility and pay related expenses and fees.