Derivative Instruments

The Company employs a variety of derivative instruments to manage its exposure to fluctuations in electricity prices, interest rates and foreign currency exchange rates. Energy prices are subject to wide swings as supply and demand are impacted by, among many other unpredictable items, weather, market liquidity, generating facility availability, customer usage, storage, and transmission and transportation constraints. Interest rate risk exists primarily on variable-rate debt for which the cash flows vary based upon movement in interest rates. Additionally, the Company is exposed to foreign currency exchange rate risk primarily from its business operations in Canada and Chile. The Company’s objectives for holding these derivative instruments include reducing, eliminating and efficiently managing the economic impact of these exposures as effectively as possible. The Company does not hedge all of its electricity price risk, interest rate risks, and foreign currency exchange rate risks, thereby exposing the unhedged portions to changes in market prices.

As of June 30, 2017, the Company had other energy-related contracts that did not meet the definition of a derivative instrument or qualified for the normal purchase normal sale scope exception and were therefore exempt from fair value accounting treatment.

The following tables present the fair values of the Company's derivative instruments on a gross basis as reflected on the Company’s consolidated balance sheets (in thousands):



	June 30, 2017
	Derivative Assets				Derivative Liabilities ⁽¹⁾
	Current		Long-Term		Current		Long-Term
Fair Value of Designated Derivatives
Interest rate swaps	$	—	$	—	$	7,540	$	20,140

Fair Value of Undesignated Derivatives
Interest rate swaps	$	—	$	842	$	2,519	$	3,622
Energy derivative	18,680		15,216		—		—
Foreign currency forward contracts	—		—		1,281		409

Total Fair Value	$	18,680	$	16,058	$	11,340	$	24,171

	December 31, 2016
	Derivative Assets				Derivative Liabilities
	Current		Long-Term		Current		Long-Term
Fair Value of Designated Derivatives
Interest rate swaps	$	—	$	40	$	8,289	$	21,058

Fair Value of Undesignated Derivatives
Interest rate swaps	$	—	$	1,788	$	3,238	$	3,463
Energy derivative	16,209		24,707		—		—
Foreign currency forward contracts	1,369		177		391		—

Total Fair Value	$	17,578	$	26,712	$	11,918	$	24,521


⁽¹⁾	Inclusive of Western Interconnect interest rate swaps which are effective as of June 30, 2017.

The following table summarizes the notional amounts of the Company's outstanding derivative instruments (in thousands except for MWh):



	Unit of Measure	June 30,		December 31,
	Unit of Measure	2017		2016
Designated Derivative Instruments
Interest rate swaps ⁽¹⁾	USD	$	433,849	$	365,443
Interest rate swaps	CAD	$	195,975	$	196,425

Undesignated Derivative Instruments
Interest rate swaps	USD	$	250,488	$	257,389
Energy derivative	MWh	911,048		1,201,691
Foreign currency forward contracts	CAD	$	142,750	$	95,800


⁽¹⁾	Inclusive of Western Interconnect interest rate swaps which are effective as of June 30, 2017.

Derivatives Designated as Hedging Instruments

Cash Flow Hedges

The Company has interest rate swap agreements to hedge variable rate project-level debt. Under these interest rate swaps, the projects make fixed-rate interest payments and the counterparties to the agreements make variable-rate interest payments. For interest swaps that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the period or periods during which a cash settlement occurs. The designated interest rate swaps have remaining maturities ranging from approximately 9.8 years to 19.3 years.

The following table presents the pre-tax effect of the derivative instruments designated as cash flow recognized in accumulated other comprehensive loss, as well as amounts reclassified to earnings for the following periods (in thousands):



		Three months ended June 30,						Six months ended June 30,
	Description	2017			2016			2017			2016
Losses recognized in accumulated OCI	Effective portion of change in fair value	$	(3,778	)	$	(11,343	)	$	(4,359	)	$	(34,763	)
Losses reclassified from accumulated OCI into:
Interest expense	Derivative settlements	$	(2,400	)	$	(3,002	)	$	(4,970	)	$	(6,206	)
Interest expense	Ineffective portion	$	88		$	(423	)	$	77		$	(512	)

The Company estimates that $6.4 million in accumulated other comprehensive income (loss) will be reclassified into earnings over the next twelve months.

Derivatives Not Designated as Hedging Instruments

The following table presents gains and losses on derivatives not designated as hedges (in thousands):



	Financial Statement Line Item		Three months ended June 30,						Six months ended June 30,
Derivative Type	Financial Statement Line Item	Description	2017			2016			2017			2016
Interest rate derivatives	Loss on undesignated derivatives, net	Change in fair value, net of settlements	$	(1,477	)	$	(3,937	)	$	(387	)	$	(12,818	)
Interest rate derivatives	Loss on undesignated derivatives, net	Derivative settlements	$	(864	)	$	(1,280	)	$	(1,833	)	$	(2,606	)
Energy derivative	Electricity sales	Change in fair value, net of settlements	$	(4,663	)	$	(9,327	)	$	(7,021	)	$	(14,152	)
Energy derivative	Electricity sales	Derivative settlements	$	5,067		$	6,752		$	11,082		$	13,485
Foreign currency forward contracts	Loss on undesignated derivatives, net	Change in fair value, net of settlements	$	(1,752	)	$	(654	)	$	(2,845	)	$	(4,615	)
Foreign currency forward contracts	Loss on undesignated derivatives, net	Derivative settlements	$	(658	)	$	(8	)	$	(334	)	$	529

Interest Rate Swaps

The Company has interest rate swap agreements to hedge variable rate project-level debt. Under these interest rate swaps, the projects make fixed-rate interest payments and the counterparties to the agreements make variable-rate interest payments. For interest rate swaps that are not designated and do not qualify as cash flow hedges, the changes in fair value are recorded in loss on undesignated derivatives, net in the consolidated statements of operations as these hedges are not accounted for under hedge accounting. The undesignated interest rate swaps have remaining maturities ranging from approximately 3.8 years to 13.0 years.

Energy Derivative

In 2010, Gulf Wind acquired an energy derivative instrument to manage its exposure to variable electricity prices over the life of the arrangement. The energy price swap fixes the price for a predetermined volume of production (the notional volume) over the life of the swap contract, through April 2019, by locking in a fixed price per MWh. The notional volume agreed to by the parties is approximately 504,220 MWh per year. The energy derivative instrument does not meet the criteria required to adopt hedge accounting. As a result, changes in fair value are recorded in electricity sales in the consolidated statements of operations.

As a result of the counterparty's credit rating downgrade, the Company received cash collateral related to the energy derivative agreement. The Company does not have the right to pledge, invest, or use the cash collateral for general corporate purposes. As of June 30, 2017, the Company has recorded a current asset of $34.4 million to funds deposited by counterparty and a current liability of $34.4 million to counterparty deposit liability representing the cash collateral received and corresponding obligation to return the cash collateral, respectively. The cash was deposited into a separate custodial account for which the Company is not entitled to the interest earned on the cash collateral.

Foreign Currency Forward Contracts

The Company has established a currency risk management program. The objective of the program is to mitigate the foreign exchange rate risk arising from transactions or cash flows that have a direct or underlying exposure in non-U.S. dollar denominated currencies in order to reduce volatility in the Company’s cash flow, which may have an adverse impact to the Company's short-term liquidity or financial condition. A majority of the Company’s power sale agreements and operating expenditures are transacted in U.S. dollars, with a growing portion transacted in currencies other than the U.S. dollar, primarily the Canadian dollar. The Company enters into foreign currency forward contracts at various times to mitigate the currency exchange rate risk on Canadian dollar denominated cash flows. These instruments have remaining maturities ranging from two to twenty-four months. The foreign currency forward contracts are considered non-designated derivative instruments and are not used for trading or speculative purposes. As a result, changes in fair value and settlements are recorded in loss on undesignated derivatives, net in the consolidated statements of operations.