Derivative Financial Instruments

Interest Rate Swaps

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

The fair values of the derivatives designated as cash flow hedges as of March 31, 2020 and December 31, 2019 on our consolidated balance sheets were as follows (in thousands):



	March 31, 2020		December 31, 2019
Assets
Prepaid expenses and other current assets	$	—	$	3
	$	—	$	3

Liabilities
Accrued expenses and other current liabilities	$	1,943	$	782
Derivative liabilities	15,472		8,459
	$	17,415	$	9,241

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 and we designated and documented the 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 $183.7 million and $184.2 million as of March 31, 2020 and December 31, 2019, 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 loss of $24,000 attributable to the change in valuation during both of the quarters ended March 31, 2020 and 2019, respectively, and 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 loss and in earnings were as follows (in thousands):



	Three Months Ended March 31,
	2020			2019
Beginning balance	$	9,238		$	3,548
Loss recognized in other comprehensive loss	8,356			2,130
Amounts reclassified from other comprehensive loss to earnings	(142		)	61
Net loss recognized in other comprehensive loss	8,214			2,191
Gain recognized in earnings	(37		)	(47		)
Ending balance	$	17,415		$	5,692

Natural Gas Derivatives

On September 1, 2011, we entered into a natural gas fixed price 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. PPA I is the only PPA Company for which natural gas was provided by us. This 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 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 quarter ended March 31, 2020 and 2019, we marked-to-market the fair value of our natural gas fixed price forward contract and recorded an unrealized loss of $0.6 million and an unrealized gain of $0.4 million, respectively. For the three months ended March 31, 2020 and 2019, we recorded a realized gain of $1.0 million and realized gain of $0.5 million, respectively, on the settlement of these contracts. Gains and losses are recorded in cost of revenue on the consolidated statement of operations.

Embedded EPP Derivatives in Sales Contracts

Embedded EPP Derivatives in Sales Contracts - We estimated the fair value of the embedded Escalation Protection Plan ("EPP") derivatives in certain sales contracts using a Monte Carlo simulation model which considers various potential electricity price forward curves over the sales contracts' terms. We use historical grid prices and available forecasts of future electricity prices to estimate future electricity prices. The grid pricing EPP guarantees that we provided in some of our sales arrangements represent an embedded derivative, with the initial value accounted for as a reduction in product revenue and any changes, reevaluated quarterly, in the fair market value of the derivative recorded in gain (loss) on revaluation of embedded derivatives. We recorded an unrealized gain of $0.3 million and an unrealized loss of $0.5 million attributable to the change in fair value for the three months ended March 31, 2020 and 2019, respectively. These gains and losses were included within loss on revaluation of embedded derivatives in the Consolidated Statements of Operations. The fair value of these derivatives was $5.9 million and $6.2 million as of March 31, 2020 and December 31, 2019, respectively.