Fair Value

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

The tables below set 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
December 31, 2019	Level 1		Level 2		Level 3		Total

Assets
Cash equivalents:
Money market funds	$	276,615	$	—	$	—	$	276,615
Interest rate swap agreements	—		3		—		3
	$	276,615	$	3	$	—	$	276,618
Liabilities
Accrued expenses and other current liabilities	$	996	$	—	$	—	$	996
Derivatives:
Natural gas fixed price forward contracts	—		—		6,968		6,968
Embedded EPP derivatives	—		—		6,176		6,176
Interest rate swap agreements	—		9,241		—		9,241
	$	996	$	9,241	$	13,144	$	23,381



	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 expenses and other current liabilities	$	1,331	$	—	$	—	$	1,331
Derivatives:
Natural gas fixed price forward contracts	—		—		9,729		9,729
Embedded EPP derivatives	—		—		4,015		4,015
Interest rate swap agreements	—		3,630		—		3,630
	$	1,331	$	3,630	$	13,744	$	18,705

Money Market Funds - Money market funds are valued using quoted market prices for identical securities and are therefore classified as Level 1 financial assets.

Short-Term Investments - Short-term investments, which are comprised of U.S. Treasury Bills with maturities of 12 months or less from the purchase date, are valued using quoted market prices for identical securities and are therefore classified as Level 1 financial assets.

Interest Rate Swap Agreements - Interest rate swap agreements are valued using quoted prices for similar contracts and are therefore classified as Level 2 financial assets. Interest rate swaps are designed as hedging instruments and are recognized at fair value on our consolidated balance sheets. As of December 31, 2019, $0.6 million of the gain on the interest rate swaps accumulated in other comprehensive income (loss) is expected to be reclassified into earnings in the next twelve months.

Natural Gas Fixed Price Forward Contracts - Natural gas fixed price forward contracts are valued using a combination of factors including the counterparty's credit rating and estimates of future natural gas prices and therefore, as no observable inputs to support market activity are available, are classified as Level 3 financial assets.

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



	December 31,
	2019			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)	1,991	$	6,968	3,096	$	9,729

¹ Recorded in current liabilities and derivative liabilities in the consolidated balance sheets.
² One MMBTU is a traditional unit of energy used to describe the heat value (energy content) of fuels.

For the years ended December 31, 2019 and 2018, we marked-to-market the fair value of our natural gas fixed price forward contracts and recorded a loss of $0.8 million and a gain of $2.2 million, respectively, and recorded gains on the settlement of these contracts of $3.6 million and $3.4 million, respectively, in cost of revenue on our 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 (6% Notes) that mature in December 2020. The 6% Notes are convertible at the option of the holders at a conversion price of $11.25 per share. The embedded redemption feature of the 6% Notes was therefore classified as an embedded derivative.

The embedded redemption feature of the 6% Notes was valued using the binomial lattice method, which utilizes significant inputs that are unobservable in the market. The fair value was determined by estimated event dates with probabilities of likely events under the scenario based upon facts existing through the date of our IPO. It was therefore classified as a Level 3 financial liability. Upon the expiration of embedded derivative features triggered by the IPO, we reclassified the fair value of the derivative liability into additional paid-in capital. The final valuation of the conversion feature was calculated as of the date of the IPO to be $178.0 million and was reclassified from derivative liability to additional paid-in capital on the balance sheet.

Embedded EPP Derivatives in Sales Contracts - We estimated the fair value of the embedded EPP derivatives in certain sales contracts using a Monte Carlo simulation model which considers various potential electricity price curves over the sales contracts' terms. We use historical grid prices and available forecasts of future electricity prices to estimate future electricity prices. We have classified these derivatives as a Level 3 financial liability.

Preferred Stock Warrants - We estimated the fair value of the preferred stock warrants using a probability-weighted expected return model which considers various potential liquidity outcomes and assigned probabilities to each to arrive at the weighted equity value. As there were no observable inputs supported by market activity, the preferred stock warrants were therefore classified as a Level 3 financial liability.

The preferred stock warrants were converted to common stock warrants effective with the IPO and reclassified to additional paid-in capital. The fair value of the preferred stock warrants was zero as of December 31, 2019 and 2018. The changes in fair value were recorded in gain (loss) on revaluation of warrant liabilities in our consolidated statements of operations.

There were no transfers between fair value measurement classifications during the years ended December 31, 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			Embedded EPP Derivative			Total
Balances at December 31, 2017	$	15,368		$	9,825		$	140,771		$	4,217		$	170,181
Settlement of natural gas fixed price forward contracts	(3,412		)	—			—			0			(3,412		)
Embedded derivative on notes and sales contracts	—			—			6,288			3			6,291
Changes in fair value	(2,227		)	(8,943		)	30,904			(205		)	19,529
Reclassification of preferred stock warrants liability to common stock warrants and derivative liability into additional paid-in-capital	—			(882		)	(177,963		)	—			(178,845		)
Balances at December 31, 2018	9,729			—			—			4,015			13,744
Settlement of natural gas fixed price forward contracts	(3,605		)	—			—			—			(3,605		)
Changes in fair value	844			—			—			2,161			3,005
Balances at December 31, 2019	$	6,968		$	—		$	—		$	6,176		$	13,144

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 our 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):



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

Customer receivables:
Customer financing receivables	$	55,855	$	44,002	$	72,676	$	51,541
Debt instruments:
Recourse
LIBOR + 4% term loan due November 2020	1,536		1,590		3,214		3,311
5% convertible promissory note due December 2020	36,482		32,070		34,706		31,546
6% convertible promissory notes due December 2020	273,410		302,047		263,284		353,368
10% notes due July 2024	89,962		97,512		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	34,969		41,108		36,319		39,892
LIBOR + 5.25% term loan due October 2020	—		—		23,916		25,441
6.07% senior secured notes due March 2030	80,016		87,618		82,337		85,917
LIBOR + 2.5% term loan due December 2021	120,436		120,510		123,384		123,040

Long-Lived Assets - Our long-lived assets include property, plant and equipment and Energy Servers capitalized in connection with our Managed Services Program and other similar arrangements. 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 year ended December 31, 2019 we upgraded the 30 megawatts of Energy Servers in PPA II and the 5.4 megawatts of Energy Servers in PPA IIIb by decommissioning these systems and selling and installing new Energy Servers. As a result of these upgrades, the useful lives of all other remaining Energy Servers included within our long-lived assets were reassessed and we concluded that no change in the useful lives or impairment of these remaining Energy Servers was identified in the year ended December 31, 2019. See Note 13, Purchase Power Agreement Programs for further information.