Derivative Financial Instruments

Interest Rate Swaps

The Company uses various financial instruments to minimize the impact of variable market conditions on its results of operations. The Company uses interest rate swaps to minimize the impact of fluctuations of interest rate changes on its outstanding debt where LIBOR is applied. The Company does not enter into derivative contracts for trading or speculative purposes.

The fair values of the derivatives designated as cash flow hedges as of December 31, 2018 and 2017 on the Company's consolidated balance sheets were as follows (in thousands):



	December 31,
	2018		2017

Assets
Prepaid expenses and other current assets	$	42	$	—
Other long-term assets	40		52
	$	82	$	52

Liabilities
Accrued other current liabilities	$	4	$	844
Derivative liabilities	3,626		5,061
	$	3,630	$	5,905

PPA Company IIIb - In September 2013, PPA Company IIIb entered into an interest rate swap arrangement to convert a variable interest rate debt to a fixed rate. The Company designated and documented its interest rate swap arrangement as a cash flow hedge. The swap’s term ends on October 1, 2020, which is concurrent with the final maturity of the debt floating interest rates reset on a quarterly basis. The Company evaluates and calculates the effectiveness of the hedge at each reporting date. The effective change was recorded in accumulated other comprehensive income (loss) and was recognized as interest expense on settlement. The notional amounts of the swap were $24.7 million and $25.6 million as of December 31, 2018 and 2017, respectively. The Company measures the swap at fair value on a recurring basis. Fair value is determined by discounting future cash flows using LIBOR rates with appropriate adjustment for credit risk.

The Company recorded a loss of $68,000, a loss of $64,000 and a loss of $57,000 during the years ended December 31, 2018, 2017 and 2016, respectively, attributable to the change in swap’s fair value. These gains and losses were included in other expense, net in the consolidated statement of operations.

PPA Company V - In July 2015, PPA Company V entered into nine interest rate swap agreements to convert a variable interest rate debt to a fixed rate. The loss on the swaps prior to designation was recorded in current-period earnings. In July 2015, the Company designated and documented its interest rate swap arrangements as cash flow hedges. Three of these swaps matured in 2016, three will mature on December 21, 2021 and the remaining three will mature on September 30, 2031. The Company evaluates and calculates the effectiveness of the hedge at each reporting date. The effective change was recorded in accumulated other comprehensive income (loss) and was recognized as interest expense on settlement. The notional amounts of the swaps were $186.6 million and $188.5 million as of December 31, 2018 and 2017, respectively.

The Company measures the swaps at fair value on a recurring basis. Fair value is determined by discounting future cash flows using LIBOR rates with appropriate adjustment for credit risk. The Company recorded a gain of $138,000, a gain of $126,000 and a gain of $72,000 attributable to the change in valuation during the years ended December 31, 2018, 2017 and 2016, respectively. These gains were included in other income (expense), net in the consolidated statement of operations.

The changes in fair value of the derivative contracts designated as cash flow hedges and the amounts recognized in accumulated other comprehensive income (loss) and in earnings for the years ended December 31, 2018 and 2017 were as follows (in thousands):



Balances at December 31, 2016	$	6,937
Loss recognized in other comprehensive loss	669
Amounts reclassified from other comprehensive loss to earnings	(1,563		)
Net gain recognized in other comprehensive income (loss)	(894		)
Gain recognized in earnings	(191		)
Balances at December 31, 2017	5,852
Gain recognized in other comprehensive income (loss)	(1,729		)
Amounts reclassified from other comprehensive income (loss) to earnings	(369		)
Net gain recognized in other comprehensive income (loss)	(2,098		)
Gain recognized in earnings	(206		)
Balances at December 31, 2018	$	3,548

Natural Gas Derivatives

On September 1, 2011, the Company entered into a fixed price fixed quantity fuel forward contract with a gas supplier. This fuel forward contract is used as part of the Company’s program to manage the risk for controlling the overall cost of natural gas. The Company's PPA Company I is the only PPA Company for which natural gas was provided by the Company. The fuel forward contract meets the definition of a derivative under U.S. GAAP. The Company has not elected to designate this contract as a hedge and, accordingly, any changes in its fair value is recorded within cost of revenue in the statements of operations. The fair value of the contract is determined using a combination of factors including the counterparty’s credit rate and estimates of future natural gas prices.

For the years ended December 31, 2018, 2017 and 2016, the Company marked-to-market the fair value of its fixed price natural gas forward contract and recorded a gain of $2.2 million, a loss of $1.0 million and a loss of $1.6 million, respectively. For the years ended December 31, 2018, 2017 and 2016, the Company recorded gains of $3.4 million, $4.2 million and $4.7 million, respectively, on the settlement of these contracts. Gains and losses are recorded in cost of revenue on the consolidated statement of operations.

6% Convertible Promissory Notes

On December 15, 2015, January 29, 2016, and September 10, 2016, the Company issued $160.0 million, $25.0 million, and $75.0 million, respectively, of 6% Convertible Promissory Notes (6% Notes) that mature in December 2020. The 6% Notes are contractually convertible at the option of the holders at a conversion price per share equal to the lower of $20.61 or 75% of the offering price of the Company’s common stock sold in an initial public offering. Upon the IPO, the options are convertible at the option of the holders at the conversion price of $11.25 per share.

The valuation of this embedded put feature was recorded as a derivative liability in the consolidated balance sheet, measured each reporting period. Fair value was determined using the binomial lattice method. The Company recorded a loss of $30.9 million, a gain of $2.6 million and a gain of $2.6 million attributable to the change in valuation for the years ended December 31, 2018, 2017 and 2016, respectively. These gains and losses were included within loss on revaluation of warrant liabilities and embedded derivatives in the consolidated statement of operations. Upon the IPO, the final valuation of the conversion feature was calculated as of the date of the IPO and was reclassified from a derivative liability to additional paid-in capital. The fair value of the embedded derivatives within the notes was $177.2 million at conversion.