3. Equity method investments in unconsolidated affiliates

The following summarizes the operating results for the three and nine months ended September 30, 2017 and 2016, respectively, for our proportional ownership interest in equity method investments:


	Three Months Ended September 30,				Nine Months Ended September 30,
Operating results	2017		2016		2017		2016
Revenue
Frederickson	$	5.9	$	5.8	$	16.0	$	15.7
Orlando Cogen, LP		14.3		13.9		40.4		40.6
Koma Kulshan Associates		0.3		0.1		1.4		1.3
Chambers Cogen, LP		10.5		11.2		33.1		34.3
Selkirk Cogen Partners, LP		—		3.1		1.8		5.9
		31.0		34.1		92.7		97.8
Project expenses
Frederickson		4.9		4.9		16.8		14.3
Orlando Cogen, LP		7.2		6.9		22.1		19.6
Koma Kulshan Associates		0.3		0.4		0.8		0.9
Chambers Cogen, LP		8.9		9.3		27.2		27.8
Selkirk Cogen Partners, LP		—		2.6		2.8		5.9
		21.3		24.1		69.7		68.5
Project other expense
Frederickson		—		—		—		—
Orlando Cogen, LP		—		—		—		—
Koma Kulshan Associates		—		—		—		—
Chambers Cogen, LP		(0.5)		(0.4)		(48.5)		(1.4)
Selkirk Cogen Partners, LP		—		—		(10.6)		—
		(0.5)		(0.4)		(59.1)		(1.4)
Project income (loss)
Frederickson		1.0		0.9		(0.8)		1.4
Orlando Cogen, LP		7.1		7.0		18.3		21.0
Koma Kulshan Associates		—		(0.3)		0.6		0.4
Chambers Cogen, LP		1.1		1.5		(42.6)		5.1
Selkirk Cogen Partners, LP		—		0.5		(11.6)		—
Equity in earnings (loss) of unconsolidated affiliates	$	9.2	$	9.6	$	(36.1)	$	27.9

Distributions from equity method investments		(13.7)		(13.0)		(30.9)		(36.5)
Deficit in earnings of equity method investments, net of distributions	$	(4.5)	$	(3.4)	$	(67.0)	$	(8.6)

We review our investments in such unconsolidated entities for impairment whenever events or changes in business circumstances indicate that the carrying amount of the investments may not be fully recoverable. Our assessment as to whether any decline in value is other than temporary is based on our ability and intent to hold the investment and whether evidence indicating the carrying value of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. We generally consider our investments in our equity method investees to be strategic long‑term investments. Therefore, we complete our assessments with a long‑term view. If the fair value of the investment is determined to be less than the carrying value and the decline in value is considered to be other than temporary, the asset is written down to its fair value.

In the second quarter of 2017, we performed impairment tests at our Chambers and Selkirk projects, which are accounted for under the equity method of accounting.

Selkirk

We own a 17.7% limited partner interest in Selkirk Cogen Partners, L.P. The project has operated as a merchant facility since the expiration of its PPA in August 2014. Since the expiration of its PPA, we have not received a distribution from Selkirk and have recorded a cumulative $1.2 million project loss. Based on the project’s history of providing no cash distributions while operating as a merchant facility, the short-term and long-term operational forecast, as well as the likelihood that further investment will be required in order to operate the facility, we determined that our investment in Selkirk is impaired and the decline in value is other than temporary. Accordingly, we recorded a $10.6 million full impairment in earnings from unconsolidated affiliates in the consolidated statements of operations in the second quarterly period of 2017.

Chambers

We own a 40% limited partner interest in Chambers Cogeneration Limited Partnership. The Chambers project operates under a PPA that expires in March 2024. Prior to our impairment analysis, Chambers was recorded as a $124 million component of our equity investments in unconsolidated affiliates on the consolidated balance sheets. We have recorded equity earnings of $3.4 million, $5.5 million and $6.5 million for the six months ended June 30, 2017, year ended December 31, 2016 and year ended December 31, 2015, respectively. During those periods, we also received cumulative distributions of $33.6 million from Chambers.

During the second quarter of 2017, we performed an analysis of the post-PPA value of Chambers operating as a merchant facility. While declining power prices have been observed over the past several years, in our most recent long-term forecast, we identified a significant decrease in the long-term outlook for power prices in the region where Chambers operates. These forward prices, which were obtained from a third party, including forward prices of gas and coal, had a significant negative impact on the estimated discounted cash flows (“DCFs”) of Chambers post-PPA. The estimated post-PPA value is a significant component of the project’s overall value when compared to its carrying value of $124 million.

When determining if this decrease in value is other than temporary, we considered the likelihood that future conditions would change such that the gas and coal prices currently observed in the forward pricing models would become more favorable over time in order for the plant to be profitable in a merchant market. We also engaged a separate third party to provide its outlook on post-PPA value for Chambers. It is our assessment that gas prices are likely to remain low when considering the current and expected future supply of shale gas. The third party provided similar conclusions to our assessment.

Based on these factors, we determined that the decline in the fair value of our equity investment in Chambers is other than temporary. We recorded a $47.1 million impairment in earnings from unconsolidated affiliates in the consolidated statements of operations for the three months ended June 30, 2017. After recording the impairment, our equity investment in Chambers is $77.2 million, which represents its estimated fair value at June 30, 2017.

We determine the fair value of our equity investments using an income approach with DCF models, as we believe forecasted cash flows are the best indicator of such fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including assumptions about discount rates, projected merchant power prices, generation, fuel costs and capital expenditure requirements. The discounted cash flows utilized in our impairment tests are generally based on approved operating plans for years with contracted PPAs and historical relationships for estimates at the expiration of PPAs. All cash flow forecasts from DCF models utilized estimated plant output for determining assumptions around future generation and industry data forward power and fuel curves to estimate future power and fuel prices. We used historical experience to determine estimated future capital investment requirements. The discount rate applied to the DCF models represents the weighted average cost of capital (“WACC”) consistent with the risk inherent in future cash flows of the particular investment and is based upon an assumed capital structure, cost of long‑term debt and cost of equity consistent with comparable independent power producers. The betas used in calculating the WACC rate were obtained from reputable third party sources. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of an equity method investment.

The valuation of equity method investments is considered a level 3 fair value measurement, which means that the valuation of the investments reflect management’s own judgments regarding the assumptions market participants would use in determining the fair value of the investments. Fair value determinations require considerable judgment and are sensitive to changes in these underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of an equity investment impairment test will prove to be accurate predictions of the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our investments may include macroeconomic factors that significantly differ from our assumptions in timing or degree, increased input costs such as higher fuel prices and maintenance costs, or lower power prices than incorporated in our long-term forecasts.