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 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, 2018
	Level 1		Level 2		Level 3		Total
Assets
Interest rate swaps	$	—	$	11,475	$	—	$	11,475
Energy derivative	—		—		12,198		12,198
Foreign currency forward contracts	—		9,816		—		9,816
	$	—	$	21,291	$	12,198	$	33,489
Liabilities
Interest rate swaps	$	—	$	25,038	$	—	$	25,038
Foreign currency forward contracts	—		2,614		—		2,614
Contingent consideration	—		—		128,000		128,000
	$	—	$	27,652	$	128,000	$	155,652



	December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets
Interest rate swaps	$	—	$	2,196	$	—	$	2,196
Energy derivative	—		—		26,872		26,872
Foreign currency forward contracts	—		5		—		5
	$	—	$	2,201	$	26,872	$	29,073
Liabilities
Interest rate swaps	$	—	$	25,758	$	—	$	25,758
Foreign currency forward contracts	—		3,623		—		3,623
Contingent consideration	—		—		21,943		21,943
	$	—	$	29,381	$	21,943	$	51,324

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 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.

Contingent Consideration

As part of the Japan Acquisition, the Company is required to pay an additional earn-out of $114.2 million, which may be increased by $9.3 million if the final Tsugaru cost is less than or equal to the construction budget or may be decreased by $9.3 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 $102.9 million, subject to foreign currency exchange rate changes. Additionally, the Company is obligated to make a $3.0 million cash distribution payment to Pattern Development 1.0 upon term conversion of the Ohorayama construction loan which occurred in June 2018. Payment for this consideration is expected to occur in late 2018; the carrying value of the contingent consideration approximates fair value.

The Broadview Project acquisition includes contingent consideration, which requires the Company to make an additional payment upon the commercial operation of the Grady project (Grady Project), a wind project being separately developed by Pattern Development 2.0. 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 considerations were 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, Fair Value Measurement. As of June 30, 2018, there were no significant changes in these unobservable inputs that 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, 2018	Fair Value	Valuation Technique	Significant Unobservable Inputs	Range
Energy derivative	$12,198	Discounted cash flow	Forward electricity prices	$28.51- $127.76⁽¹⁾
			Discount rate	2.34% - 2.53%

Broadview contingent consideration	$24,497	Discounted cash flow	Discount rate	4.0% - 8.0%
			Annual energy production loss	0.7%
Tsugaru contingent consideration	$100,650	Discounted cash flow	Deferred purchase price	$109 - $128 million
			Discount rate	6.9%

December 31, 2017	Fair Value	Valuation Technique	Significant Unobservable Inputs	Range
Energy derivative	$26,872	Discounted cash flow	Forward electricity prices	$14.44 - $71.45⁽¹⁾
			Discount rate	1.69% - 1.96%

Contingent consideration	$21,943	Discounted cash flow	Discount rate	4.0% - 8.0%
			Annual energy production loss	1.0%


⁽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	2018			2017			2018			2017
Balances, beginning of period	$	15,824		$	38,559		$	26,872		$	40,916
Total gain (loss) included in electricity sales	1,482			403			(4,071		)	4,061
Settlements	(5,108		)	(5,067		)	(10,603		)	(11,082		)
Balances, end of period	$	12,198		$	33,895		$	12,198		$	33,895

During the three and six months ended June 30, 2018, the Company recognized unrealized losses of $3.6 million and $14.7 million, respectively, and $4.7 million and $7.0 million for the same periods in 2017, respectively, 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	2018			2017		2018		2017
Balances, beginning of period	130,901			—		21,943		—
Purchase	—			21,284		105,922		21,284
(Gain) loss included in other income (expense), net	(2,901		)	218		135		218
Balances, end of period	$	128,000		$	21,502	$	128,000	$	21,502

During the three and six months ended June 30, 2018, the Company recognized unrealized gain on the contingent consideration liability of $2.9 million and $0.1 million, respectively, which was recorded to other income (expense), 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, 2018
Long-term debt, including current portion	$	2,186,326	$	—	$	2,155,670	$	—	$	2,155,670
December 31, 2017
Long-term debt, including current portion	$	1,930,731	$	—	$	1,937,671	$	—	$	1,937,671

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.