Fair Value

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below sets forth, by level, our financial assets that were accounted for at fair value for the respective periods. The table does not include assets and liabilities that are measured at historical cost or any basis other than fair value (in thousands):



	Fair Value Measured at Reporting Date Using
September 30, 2019	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents:
Money market funds	$	126,564	$	—	$	—	$	126,564
Interest rate swap agreements	—		6		—		6
	$	126,564	$	6	$	—	$	126,570
Liabilities
Accrued other current liabilities	$	433	$	—	$	—	$	433
Derivatives:
Natural gas fixed price forward contracts	—		—		8,465		8,465
Interest rate swap agreements¹	—		11,548		—		11,548
	$	433	$	11,548	$	8,465	$	20,446

¹As of September 30, 2019, $0.8 million of the gain on the interest rate swaps accumulated in other comprehensive gain (loss) is expected to be reclassified into earnings in the next twelve months.



	Fair Value Measured at Reporting Date Using
December 31, 2018	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents:
Money market funds	$	143,843	$	—	$	—	$	143,843
Short-term investments	104,350		—		—		104,350
Interest rate swap agreements	—		82		—		82
	$	248,193	$	82	$	—	$	248,275
Liabilities
Accrued other current liabilities	$	1,331	$	—	$	—	$	1,331
Derivatives:
Natural gas fixed price forward contracts	—		—		9,729		9,729
Interest rate swap agreements	—		3,630		—		3,630
	$	1,331	$	3,630	$	9,729	$	14,690

The following table provides the fair value of our natural gas fixed price forward contracts (dollars in thousands):

September 30, 2019

December 31, 2018

Number of

Contracts

(MMBTU)²

Fair

Value

Number of
Contracts
(MMBTU)²

Fair

Value

Liabilities¹

Natural gas fixed price forward contracts (not under hedging relationships)

2,286

8,465

3,096

9,729

¹ Recorded in accrued other current liabilities and derivative liabilities, net of current portion, in the condensed consolidated balance sheets.

² One MMBTU, or one million British Thermal Units, is a traditional unit of energy used to describe the heat value (energy content) of fuels.

For the three months ended September 30, 2019 and 2018, we marked-to-market the fair value of fixed price natural gas forward contracts and recorded a loss of $0.8 million and a gain of $1.1 million, respectively, and recorded gains on the settlement of these contracts of $1.1 million and $0.6 million, respectively, in cost of electricity revenue on the condensed consolidated statement of operations. For the nine months ended September 30, 2019 and 2018, we marked-to-market the fair value of fixed price natural gas forward contracts and recorded a loss of $1.5 million and a gain of $1.1 million, respectively, and recorded gains on the settlement of these contracts of $2.7 million and $2.9 million, respectively, in cost of electricity revenue on the condensed consolidated statement of operations.

Embedded Derivative on 6% Convertible Promissory Notes - Between December 2015 and September 2016, we issued $260.0 million of 6% convertible promissory notes due December 2020 ("6% Notes") to certain investors. The 6% Notes bore a 5% fixed interest rate, payable monthly either in cash or in kind, at our election. We amended the terms of the 6% Notes in June 2017 to reduce the collateral securing the notes and to increase the interest rate from 5% to 6%. The 6% Notes are convertible at the option of the holders at a conversion price of $11.25 per share. Upon the IPO, the final value of the conversion feature was $177.2 million and was reclassified from a derivative liability to additional paid-in capital.

There were no transfers between fair value measurement classifications during the periods ended September 30, 2019 and 2018. The changes in the Level 3 financial assets were as follows (in thousands):



	Natural Gas Fixed Price Forward Contracts			Preferred Stock Warrants		Embedded Derivative Liability		Total
Balances at December 31, 2018	$	9,729		$	—	$	—	$	9,729
Settlement of natural gas fixed price forward contracts	(2,741		)	—		—		(2,741		)
Changes in fair value	1,477			—		—		1,477
Balances at September 30, 2019	$	8,465		$	—	$	—	$	8,465



	Natural Gas Fixed Price Forward Contracts			Preferred Stock Warrants			Embedded Derivative Liability			Total
Balances at December 31, 2017	$	15,368		$	9,825		$	140,771		$	165,964
Settlement of natural gas fixed price forward contracts	(2,871		)	—			—			(2,871		)
Embedded derivative on notes	—			—			5,533			5,533
Changes in fair value	(1,052		)	(8,943		)	30,904			20,909
Reclassification of preferred stock warrants liability to common stock warrants and derivative liability into additional paid-in-capital	—			(882		)	(177,208		)	(178,090		)
Balances at September 30, 2018	$	11,445		$	—		$	—		$	11,445

Significant changes in any assumption input in isolation can result in a significant change in fair value measurement. Generally, an increase in the market price of our shares of common stock, an increase in natural gas prices, an increase in the volatility of ours shares of common stock and an increase in the remaining term of the conversion feature would each result in a directionally similar change in the estimated fair value of our derivative liability. Increases in such assumption values would increase the associated liability while decreases in these assumption values would decrease the associated liability. An increase in the risk-free interest rate or a decrease in the market price of our shares of common stock would result in a decrease in the estimated fair value measurement and thus a decrease in the associated liability.

Financial Assets and Liabilities Not Measured at Fair Value on a Recurring Basis

Customer Receivables and Debt Instruments - We estimate fair value for customer financing receivables, senior secured notes, term loans and convertible promissory notes based on rates currently offered for instruments with similar maturities and terms (Level 3). The following table presents the estimated fair values and carrying values of customer receivables and debt instruments (in thousands):



	September 30, 2019				December 31, 2018
	Net Carrying Value		Fair Value		Net Carrying Value		Fair Value

Customer receivables:
Customer financing receivables	$	68,535	$	52,495	$	72,676	$	51,541
Debt instruments:
Recourse
LIBOR + 4% term loan due November 2020	1,956		2,016		3,214		3,311
5% convertible promissory note due December 2020	36,026		34,509		34,706		31,546
6% convertible promissory notes due December 2020	275,716		289,887		263,284		353,368
10% notes due July 2024	89,673		94,974		95,555		99,260
Non-recourse
5.22% senior secured notes due March 2025	—		—		78,566		80,838
7.5% term loan due September 2028	35,281		41,335		36,319		39,892
LIBOR + 5.25% term loan due October 2020	23,571		24,637		23,916		25,441
6.07% senior secured notes due March 2030	80,677		88,243		82,337		85,917
LIBOR + 2.5% term loan due December 2021	121,069		121,417		123,384		123,040

Long-Lived Assets - Our long-lived assets include property, plant and equipment and equity investments in PPA II assets. The carrying amounts of our long-lived assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than originally estimated.

During the three and nine months ended September 30, 2019, there was a decommissioning in PPA II, including the replacement during 2019 of installed Energy Servers, resulting in charges related to the decommissioning of PPA II Energy Servers on these assets of $14.6 million and $22.7 million, respectively, which was recognized in cost of electricity revenue in our condensed consolidated statement of operations. As a result of the deconsolidation of DSGP, we remeasured our remaining equity interest in DSGP at fair value of $27.8 million as of June 30, 2019. The fair value of our interest in DSGP was determined based upon the projected discounted cash flows of DSGP that are attributable to DSGH’s remaining interest in DSGP, a level 3 fair value measurement. The most significant inputs into the valuation were a projection of future cash inflows from the PPA II tariff and future cash outflows from operations and maintenance of the Energy Servers not subject to SPDS’s purchase interests and the discount rate applied to those cash flows. As of September 30, 2019, the net carrying value of our interest in DSGP was $27.2 million. Equity investments in PPA II assets are also financial assets that are not measured on a recurring basis. See Note 12 - Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers for additional information.

No material impairment in the fair value assessment of any other long-lived assets was identified in the nine months ended September 30, 2019 and 2018.