Derivative Financial Instruments

Interest Rate Swaps

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

The fair values of the derivatives related to interest rate swap agreements applied to two of our PPA companies designated as cash flow hedges as of September 30, 2019 and December 31, 2018 on our consolidated balance sheets were as follows (in thousands):



	September 30,		December 31,
	2019		2018

Assets
Prepaid expenses and other current assets	$	—	$	42
Other long-term assets	6		40
	$	6	$	82

Liabilities
Accrued other current liabilities	$	894	$	4
Derivative liabilities	10,654		3,626
	$	11,548	$	3,630

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. We designated and documented our 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. We evaluate and calculate 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 $24.1 million and $24.7 million as of September 30, 2019 and December 31, 2018, respectively. We measure 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.

We recorded a loss of $12,000 and a gain of $30,000 during the three months ended September 30, 2019 and 2018, respectively, attributable to the change in swap’s fair value. We recorded a loss of $35,000 and a gain of $31,000 during the nine months ended September 30, 2019 and 2018, respectively, attributable to the change in swap’s fair value. These gains and losses were included in gain (loss) on revaluation of warrant liabilities and embedded derivatives in the condensed 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, we 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. We evaluate and calculate 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 $185.0 million and $186.6 million as of September 30, 2019 and December 31, 2018, respectively.

We measure 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. We recorded a gain of $36,000 and a gain of $40,000 attributable to the change in valuation during the three months ended September 30, 2019 and 2018, respectively. We recorded a gain of $48,000 and a gain of $149,000 attributable to the change in valuation during the nine months ended September 30, 2019 and 2018, respectively. These gains were included in gain (loss) on revaluation of warrant liabilities and embedded derivatives in the condensed consolidated statement of operations.

We recognize the unrealized changes in the fair value of our derivative contracts designated as cash flow hedges in accumulated other comprehensive income (loss). Upon settlement, changes in the fair value amounts recognized in accumulated other comprehensive income (loss) are recognized to earnings. The changes for the three and nine months ended September 30, 2019 and 2018 were as follows (in thousands):



	Three Months Ended						Nine Months Ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
Beginning balance	$	9,146		$	1,771		$	3,548		$	5,853
Loss (gain) recognized in other comprehensive income (loss)	2,472			(1,173		)	8,062			(4,796		)
Amounts reclassified from other comprehensive income (loss) to earnings	(28		)	(63		)	75			(360		)
Net loss (gain) recognized in other comprehensive income (loss)	2,444			(1,236		)	8,137			(5,156		)
Gain reclassified from other comprehensive income (loss) to earnings	(48		)	(58		)	(143		)	(220		)
Ending balance	$	11,542		$	477		$	11,542		$	477

Natural Gas Derivatives

On September 1, 2011, we entered into a fixed price fixed quantity fuel forward contract with a gas supplier. This fuel forward contract is used as part of our program to manage the risk for controlling the overall cost of natural gas. Our PPA Company I is the only PPA Company for which we provided natural gas. The fuel forward contract meets the definition of a derivative under U.S. GAAP. We have not elected to designate this contract as a hedge and, accordingly, any changes in its fair value is recorded within cost of electricity revenue in the condensed consolidated 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 three months ended September 30, 2019 and 2018, we marked-to-market the fair value of our fixed price natural gas forward contract and recorded a loss of $0.8 million and a gain of $1.1 million, respectively. For the nine months ended September 30, 2019 and 2018, we marked-to-market the fair value of our fixed price natural gas forward contract and recorded a loss of $1.5 million and a gain of $1.1 million, respectively. For the three months ended September 30, 2019 and 2018, we recorded gains of $1.1 million and $0.6 million, respectively, on the settlement of these contracts. For the nine months ended September 30, 2019 and 2018, we recorded gains of $2.7 million and $2.9 million, respectively, on the settlement of these contracts. Gains and losses are recorded in cost of electricity revenue in the condensed consolidated statements of operations.

6% Convertible Promissory Notes

On December 15, 2015, January 29, 2016, and September 10, 2016, we 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 our 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. We recorded $0 and a gain of $0.1 million attributable to the change in valuation for the three months ended September 30, 2019 and 2018, respectively. We recorded $0 and a loss of $30.9 million attributable to the change in valuation for the nine months ended September 30, 2019 and 2018, respectively. These gains and losses were included within loss on revaluation of warrant liabilities and embedded derivatives in gain (loss) on revaluation of warrant liabilities and embedded derivatives in the condensed consolidated statements of operations. 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.