Fair Value Measurements

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 valuations 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 thousands):



	June 30, 2017
	Level 1		Level 2		Level 3		Total
Assets
Interest rate swaps	$	—	$	842	$	—	$	842
Energy derivative	—		$	—	33,895		33,895
	$	—	$	842	$	33,895	$	34,737
Liabilities
Interest rate swaps	$	—	$	33,821	$	—	$	33,821
Foreign currency forward contracts	—		1,691		—		1,691
Contingent consideration	—		—		21,502		21,502
	$	—	$	35,512	$	21,502	$	57,014



	December 31, 2016
	Level 1		Level 2		Level 3		Total
Assets
Interest rate swaps	$	—	$	1,828	$	—	$	1,828
Energy derivative	—		—		40,916		40,916
Foreign currency forward contracts	—		1,546		—		1,546
	$	—	$	3,374	$	40,916	$	44,290
Liabilities
Interest rate swaps	$	—	$	36,048	$	—	$	36,048
Foreign currency forward contracts	—		391		—		391
	$	—	$	36,439	$	—	$	36,439

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 are 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 are further evaluated for reasonableness by obtaining additional documentation from the third-party valuation provider.

The energy derivative instrument is valued by discounting the projected net cash flows over the remaining life of the derivative instrument using forward electricity prices which are derived from observable prices, such as forward gas curves, adjusted by a non-observable heat rate for when the contract term extends beyond a period for which market data is available. The significant unobservable input in calculating the fair value of the energy derivative instrument is forward electricity prices. Significant increases or decreases in this unobservable input would result in a significantly lower or higher fair value measurement.

Contingent Consideration

The Broadview Project acquisition includes contingent consideration, which requires the Company to make an additional payment upon the commercial operation of the Grady Project. 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 the Grady Project, adjusted for the estimated production loss incurred by Broadview due to wake effects and transmission losses induced by the operation of the Grady Project. The fair value of the contingent consideration at the acquisition date was $21.3 million. The estimated fair value of the contingent consideration was calculated by using a discounted cash flow technique which utilized unobservable inputs presented in the table below. 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. As of June 30, 2017, there were no significant changes in the recognized amount for the contingent consideration recognized as a result of the acquisition of the Broadview Project. Significant changes in these unobservable inputs may result in significant changes in fair value.

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows (in thousands, for fair value):



June 30, 2017	Fair Value	Valuation Technique	Significant Unobservable Inputs	Range
Energy derivative	$33,895	Discounted cash flow	Forward electricity prices	$14.52 - $77.10⁽¹⁾
			Discount rate	1.30% - 1.62%

Contingent consideration	$21,502	Discounted cash flow	Discount rate	4.0% - 8.0%
			Annual energy production loss	1%

December 31, 2016	Fair Value	Valuation Technique	Significant Unobservable Inputs	Range
Energy derivative	$40,916	Discounted cash flow	Forward electricity prices	$15.83 - $81.76⁽¹⁾
			Discount rate	1.00% - 1.52%


⁽¹⁾	Represents price per MWh.

The following tables present a reconciliation of the energy derivative contract and contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (in thousands):



	Three months ended June 30,						Six months ended June 30,
Energy Derivative	2017			2016			2017			2016
Balances, beginning of period	$	38,559		$	58,858		$	40,916		$	63,683
Total gain (loss) included in electricity sales	403			(2,575		)	4,061			(667		)
Settlements	(5,067		)	(6,752		)	(11,082		)	(13,485		)
Balances, end of period	$	33,895		$	49,531		$	33,895		$	49,531

During the three and six months ended June 30, 2017, the Company recognized an unrealized loss on the energy derivative of $4.7 million and $7.0 million, respectively, and $9.3 million and $14.2 million, respectively, for the same periods in the prior year, which were recorded to electricity sales on the consolidated statements of operations.



	Three months ended June 30,			Six months ended June 30,
Contingent Consideration Liability	2017		2016	2017		2016
Balances, beginning of period	$	—	N/A	$	—	N/A
Purchase	21,284		N/A	21,284		N/A
Total loss included in other income, net	218		N/A	218		N/A
Settlement	—		N/A	—		N/A
Balances, end of period	$	21,502	N/A	$	21,502	N/A

During the three and six months ended June 30, 2017, the Company recognized an unrealized loss on the contingent consideration liability of $0.2 million, which was recorded to other income, net on the consolidated statements of operations.

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 thousands):



			Fair Value
	As reflected on the balance sheet		Level 1		Level 2		Level 3		Total
June 30, 2017
Long-term debt, including current portion	$	1,826,645	$	—	$	1,827,997	$	—	$	1,827,997
December 31, 2016
Long-term debt, including current portion	$	1,383,672	$	—	$	1,382,038	$	—	$	1,382,038

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.