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Fair Value

9 Months Ended

Sep. 30, 2020

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
September 30, 2020	Level 1		Level 2		Level 3		Total

Assets
Cash equivalents:
Money market funds	$	438,234	$	—	$	—	$	438,234


	$	438,234	$	—	$	—	$	438,234
Liabilities
Accrued expenses and other current liabilities	$	—	$	—	$	—	$	—
Derivatives:
Natural gas fixed price forward contracts	—		—		3,245		3,245

Embedded EPP derivatives	—		—		3,975		3,975
Interest rate swap agreements	—		17,272		—		17,272
	$	—	$	17,272	$	7,220	$	24,492


	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 condensed consolidated balance sheets. As of September 30, 2020, we expect $1.9 million of the loss on the interest rate swaps accumulated in other comprehensive income (loss) to be reclassified into earnings in the next 12 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 liabilities.

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

September 30, 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)

1,112

3,245

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 September 30, 2020 and 2019, we recorded the fair value of our natural gas fixed price forward contracts and recorded an unrealized loss of $0.7 million and an unrealized loss of $0.8 million, respectively. For the three months ended September 30, 2020 and 2019, we recorded the fair value of our natural gas fixed price forward contracts and recognized a realized gain of $1.2 million and a realized gain of $1.1 million, respectively, on the settlement of these contracts in cost of revenue on our condensed consolidated statements of operations.

For the nine months ended September 30, 2020 and 2019, we recorded the fair value of our natural gas fixed price forward contracts and recognized an unrealized loss of $1.5 million in 2019, with no material unrealized gains or losses in 2020. We recorded the fair value of our natural gas fixed price forward contracts and recognized realized gains of $3.7 million and $2.7 million for the nine months ended September 30, 2020 and 2019, respectively, on the settlement of these contracts in cost of revenue on our condensed consolidated statements 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 September 30, 2020 and 2019, we recorded the fair value of the embedded EPP derivatives and recognized an unrealized gain of $1.5 million and an unrealized loss of $0.5 million, respectively, in gain (loss) on revaluation of embedded derivatives on our condensed consolidated statements of operations. For the nine months ended September 30, 2020 and 2019, we recorded the fair value of the embedded EPP derivatives and recognized an unrealized gain of $2.2 million and an unrealized loss of $1.6 million, respectively, in gain (loss) on revaluation of embedded EPP derivatives on our condensed consolidated statements of operations.

There were no transfers between fair value measurement classifications during the three and nine months ended September 30, 2020 and 2019.

The changes in the Level 3 financial liabilities during the three months ended September 30, 2020 were as follows (in thousands):


	Natural Gas Fixed Price Forward Contracts		Embedded Derivative Liability		Total
Liabilities at June 30, 2020	$	5,185	$	5,480	$	10,665
Settlement of natural gas fixed price forward contracts	(1,214)		—		(1,214)
Changes in fair value	(726)		(1,505)		(2,231)
Liabilities at September 30, 2020	$	3,245	$	3,975	$	7,220

The changes in the Level 3 financial liabilities during the nine months ended September 30, 2020 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	(3,692)		—		(3,692)
Changes in fair value	(31)		(2,201)		(2,232)
Liabilities at September 30, 2020	$	3,245	$	3,975	$	7,220

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

As of September 30, 2020

Commodity Contracts

Derivative Liabilities

Valuation Technique

Unobservable Input

Units

Range

Average

(in thousands)

($ per Units)

Natural Gas

3,245

Discounted Cash Flow

Forward basis price

MMBtu

$2.86 - $5.50

3.85

As of December 31, 2019

Commodity Contracts

Derivative Liabilities

Valuation Technique

Unobservable Input

Units

Range

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 September 30, 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 dollars per kilowatt hours 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 - The fair value for customer financing receivables is based on a discounted cash flow model, whereas the fair value approximates the present value of the receivables (Level 3). The senior secured notes, term loans and convertible promissory notes are 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, 2020				December 31, 2019
	Net Carrying Value		Fair Value		Net Carrying Value		Fair Value

Customer receivables
Customer financing receivables	$	52,066	$	43,623	$	55,855	$	44,002
Debt instruments
Recourse:
LIBOR + 4% term loan due November 2020	278		287		1,536		1,590
5% convertible promissory Constellation note due December 2021	—		—		36,482		32,070

10% convertible promissory notes due December 20211	99,379		234,816		273,410		302,047
10% notes due July 2024	76,743		71,385		89,962		97,512
10.25% senior secured notes due March 2027	68,526		59,747		—		—
2.5% green convertible senior notes due August 2025	98,212		293,135		—		—
Non-recourse:

7.5% term loan due September 2028	32,717		36,665		34,969		41,108

6.07% senior secured notes due March 2030	77,846		89,079		80,016		87,618
LIBOR + 2.5% term loan due December 2021	117,145		117,457		120,437		120,510

1The fair value on the 10% convertible notes increased due to the increase in the fair value of the conversion feature.

Long-Lived Assets - Our long-lived assets include property, plant and equipment and Energy Servers capitalized in connection with our Managed Services Financing 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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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