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
March 31, 2020	Level 1		Level 2		Level 3		Total

Assets
Cash equivalents:
Money market funds	$	271,435	$	—	$	—	$	271,435
	$	271,435	$	—	$	—	$	271,435
Liabilities
Accrued expenses and other current liabilities	$	697	$	—	$	—	$	697
Derivatives:
Natural gas fixed price forward contracts	—		—		6,503		6,503
Embedded EPP derivatives	—		—		5,892		5,892
Interest rate swap agreements	—		17,415		—		17,415
	$	697	$	17,415	$	12,395	$	30,507



	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

Money Market Funds - Money market funds 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 March 31, 2020, $1.8 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 liabilities.

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

March 31, 2020

December 31, 2019

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)

1,699

6,503

1,991

6,968

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 three months ended March 31, 2020 and 2019, we marked-to-market the fair value of our natural gas fixed price forward contracts and recorded an unrealized loss of $0.6 million and an unrealized gain of $0.4 million, respectively, and recorded a realized gain of $1.0 million and a realized gain of $0.5 million, respectively, on the settlement of these contracts in cost of revenue on our condensed consolidated statement of operations.

Embedded EPP Derivative Liability 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. For the three months ended March 31, 2020 and 2019, we marked-to-market the fair value of our embedded EPP derivatives and recorded an unrealized gain of $0.3 million and an unrealized loss of $0.5 million, respectively, in gain (loss) on revaluation of embedded derivatives on our condensed consolidated statement of operations.

There were no transfers between fair value measurement classifications during the periods ended March 31, 2020 and 2019. The changes in the Level 3 financial liabilities were as follows (in thousands):



	Natural Gas Fixed Price Forward Contracts			Embedded EPP Derivative Liability			Total
Liabilities at December 31, 2019	$	6,968		$	6,176		$	13,144
Settlement of natural gas fixed price forward contracts	(1,025		)	—			(1,025		)
Changes in fair value	560			(284		)	276
Liabilities at March 31, 2020	$	6,503		$	5,892		$	12,395

The following table presents the unobservable inputs related to our Level 3 liabilities:

For the Three Months Ended March 31, 2020

Commodity Contracts

Derivative Liabilities

Valuation Technique

Unobservable Input

Units

Range

Weighted Average

(in thousands)

($ per Units)

Natural Gas

6,503

Discounted Cash Flow

Forward basis price

MMBtu

$1.69 - $4.61

2.88

For the Three Months Ended December 31, 2019

Commodity Contracts

Derivative Liabilities

Valuation Technique

Unobservable Input

Units

Range

Weighted Average

(in thousands)

($ per Units)

Natural Gas

6,968

Discounted Cash Flow

Forward basis price

MMBtu

$2.39 - $5.65

3.23

The unobservable inputs used in the fair value measurement of the natural gas commodity types consist of inputs that are less observable due in part to lack of available broker quotes, supported by little, if any, market activity at the measurement date or are based on internally developed models. Certain basis prices (i.e., the difference in pricing between two locations) included in the valuation of natural gas contracts were deemed unobservable.

To estimate the liabilities related to the EPP contracts an option pricing method was implemented through a Monte Carlo simulation. The unobservable inputs were simulated based on the available values for Avoided Cost and Cost of Electricity as calculated for March 31, 2020 and December 31, 2019, using an expected growth rate of 7% over the contracts life and volatility of 20%. The estimated growth rate and volatility were estimated based on the historical tariff changes for the period 2008 to 2020. Avoided Cost is the Transmission and Distribution cost expressed in $/kWh avoided in the given year of the contract, calculated using the billing rates of the effective utility tariff applied during the year to the host account for which usage is offset by the generator. If the billing rates within the utility tariff change during the measurement period, the average of the amount of charge for each rate shall be weighted by the number of effective months for each amount.

The inputs listed above would have had a direct impact on the fair values of the above derivatives if they were adjusted. Generally, an increase in natural gas prices and a decrease in electric grid prices would each result in an increase in the estimated fair value of our derivative liabilities.

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):



	March 31, 2020				December 31, 2019
	Net Carrying Value		Fair Value		Net Carrying Value		Fair Value

Customer receivables
Customer financing receivables	$	54,616	$	43,567	$	55,855	$	44,002
Debt instruments
Recourse:
LIBOR + 4% term loan due November 2020	1,117		1,116		1,536		1,590
10% convertible promissory Constellation note due December 2021	40,709		40,709		36,482		32,070
10% convertible promissory notes due December 2021	338,944		340,694		273,410		302,047
10% notes due July 2024	83,230		72,582		89,962		97,512
Non-recourse:
7.5% term loan due September 2028	33,036		32,053		34,969		41,108
6.07% senior secured notes due March 2030	79,319		78,831		80,016		87,618
LIBOR + 2.5% term loan due December 2021	119,646		104,377		120,436		120,510

Long-Lived Assets - Our long-lived assets include property, plant and equipment and Energy Servers capitalized in connection with our Managed Services Program, Purchase Power Agreement Programs 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 quarter ended March 31, 2020, we upgraded 0.4 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 period ended March 31, 2020. See Note 13, Purchase Power Agreement Programs for further information.