Derivative Instruments
 9 Months Ended
Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
The Company employs a variety of derivative instruments to manage its exposure to fluctuations in electricity prices, interest rates and foreign currency exchange rates. Energy prices are subject to wide swings as supply and demand are impacted by, among many other unpredictable items, weather, market liquidity, generating facility availability, customer usage, storage, and transmission and transportation constraints. Interest rate risk exists primarily on variable-rate debt for which the cash flows vary based upon movement in market prices. Additionally, the Company is exposed to foreign currency exchange rate risk primarily from its business operations in Canada and Chile. The Company’s objectives for holding these derivative instruments include reducing, eliminating and efficiently managing the economic impact of these exposures as effectively as possible. The Company does not hedge all of its electricity price risk, interest rate risks, and foreign currency exchange rate risks, thereby exposing the unhedged portions to changes in market prices.
As of September 30, 2016, the Company had other energy-related contracts that did not meet the definition of a derivative instrument or qualified for the normal purchase normal sale scope exception and were therefore exempt from fair value accounting treatment.
The following tables present the fair values of the Company's derivative instruments on a gross basis as reflected on the Company’s consolidated balance sheets (in thousands):
 
 
September 30, 2016
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Current
 
Long-Term
 
Current
 
Long-Term
Fair Value of Designated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
—

 
$
—

 
$
10,293

 
$
50,166

 
 
 
 
 
 
 
 
 
Fair Value of Undesignated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
—

 
$
—

 
$
3,957

 
$
14,605

Energy derivative
 
18,457

 
30,256

 
—

 
—

Foreign currency forward contracts
 
740

 
3

 
695

 
66

 
 
 
 
 
 
 
 
 
Total Fair Value
 
$
19,197

 
$
30,259

 
$
14,945

 
$
64,837

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Current
 
Long-Term
 
Current
 
Long-Term
Fair Value of Designated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
—

 
$
—

 
$
10,034

 
$
24,360

 
 
 
 
 
 
 
 
 
Fair Value of Undesignated Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
—

 
$
559

 
$
4,309

 
$
4,299

Energy derivative
 
20,856

 
42,827

 
—

 
—

Foreign currency forward contracts
 
3,482

 
628

 
—

 
—

 
 
 
 
 
 
 
 
 
Total Fair Value
 
$
24,338

 
$
44,014

 
$
14,343

 
$
28,659


The following table summarizes the notional amounts of the Company's outstanding derivative instruments (in thousands except for MWh):
 
 
Unit of Measure
 
September 30,
 
December 31,
 
 
 
2016
 
2015
Designated Derivative Instruments
 
 
 
 
 
 
Interest rate swaps
 
USD
 
$
367,824

 
$
379,808

Interest rate swaps
 
CAD
 
$
196,650

 
$
196,988

 
 
 
 
 
 
 
Undesignated Derivative Instruments
 
 
 
 
 
 
Interest rate swaps
 
USD
 
$
259,469

 
$
275,424

Energy derivative
 
MWh
 
1,322,387

 
1,707,350

Foreign currency forward contracts
 
CAD
 
$
267,700

 
$
62,300


Derivatives Designated as Hedging Instruments
Cash Flow Hedges
The Company has interest rate swap agreements to hedge variable rate project-level debt. Under these interest rate swaps, the projects make fixed-rate interest payments and the counterparties to the agreements make variable-rate interest payments. For interest swaps that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the period or periods during which a cash settlement occurs. The designated interest rate swaps have remaining maturities ranging from approximately 11.0 years to 20.0 years.
The following table presents gains and losses on derivative contracts designated and qualifying as cash flow hedges recognized in accumulated other comprehensive income (loss), as well as amounts reclassified to earnings for the following periods (in thousands):
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
Description
 
2016
 
2015
 
2016
 
2015
Gains (losses) recognized in accumulated OCI
 
Effective portion of change in fair value
 
$
(329
)
 
$
(15,600
)
 
$
(30,990
)
 
$
(16,257
)
Gains (losses) reclassified from accumulated OCI into:
 
 
 
 
 
 
 
 
 
 
Interest expense, net of tax
 
Derivative settlements
 
$
(2,736
)
 
$
(2,590
)
 
$
(8,359
)
 
$
(9,546
)
Realized loss on designated derivatives, net
 
Termination of derivatives
 
$
—

 
$
(11,221
)
 
$
—

 
$
(11,221
)
Gains (losses) recognized in interest expense
 
Ineffective portion
 
$
365

 
$
—

 
$
(147
)
 
$
—


The Company estimates that $7.9 million in accumulated other comprehensive loss will be reclassified into earnings over the next twelve months.
Gulf Wind
On July 28, 2015, in connection with the early extinguishment of Gulf Wind's term loan, the Company terminated the related interest rate swaps which resulted in the reclassification of $11.2 million in accumulated other comprehensive loss to realized loss on designated derivatives, net in the consolidated statements of operations.
Derivatives Not Designated as Hedging Instruments
The following table presents gains and losses on derivatives not designated as hedges (in thousands):
 
 
Financial Statement Line Item
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
Derivative Type
 
 
Description
 
2016
 
2015
 
2016
 
2015
Interest rate derivatives
 
Gain (loss) on undesignated derivatives, net
 
Change in fair value, net of settlements
 
$
2,305

 
$
(7,570
)
 
$
(10,513
)
 
$
(5,264
)
Interest rate derivatives
 
Gain (loss) on undesignated derivatives, net
 
Derivative settlements
 
$
(1,272
)
 
$
(1,383
)
 
$
(3,878
)
 
$
(3,302
)
Energy derivative
 
Electricity sales
 
Change in fair value, net of settlements
 
$
(818
)
 
$
4,630

 
$
(14,970
)
 
$
1,600

Energy derivative
 
Electricity sales
 
Derivative settlements
 
$
3,144

 
$
2,969

 
$
16,629

 
$
15,066

Foreign currency forward contracts
 
Gain (loss) on undesignated derivatives, net
 
Change in fair value, net of settlements
 
$
487

 
$
2,480

 
$
(4,128
)
 
$
2,871

Foreign currency forward contracts
 
Gain (loss) on undesignated derivatives, net
 
Derivative settlements
 
$
305

 
$
382

 
$
834

 
$
382


Interest Rate Swaps
The Company has interest rate swap agreements to hedge variable rate project-level debt. Under these interest rate swaps, the projects make fixed-rate interest payments and the counterparties to the agreements make variable-rate interest payments. For interest rate swaps that are not designated and do not qualify as cash flow hedges, the changes in fair value are recorded in gain (loss) on undesignated derivatives, net in the consolidated statements of operations as these hedges are not accounted for under hedge accounting. The undesignated interest rate swaps have remaining maturities ranging from approximately 4.5 years to 13.8 years.
Energy Derivative
In 2010, Gulf Wind acquired an energy derivative instrument to manage its exposure to variable electricity prices over the life of the arrangement. The energy price swap fixes the price for a predetermined volume of production (the notional volume) over the life of the swap contract, through April 2019, by locking in a fixed price per MWh. The notional volume agreed to by the parties is approximately 504,220 MWh per year. The energy derivative instrument does not meet the criteria required to adopt hedge accounting. As a result, changes in fair value are recorded in electricity sales in the consolidated statements of operations.
As a result of the counterparty's credit rating downgrade, the Company received cash collateral related to the energy derivative agreement. The Company does not have the right to pledge, invest, or use the cash collateral for general corporate purposes. As of September 30, 2016, the Company has recorded a current asset of $46.6 million to funds deposited by counterparty and a current liability of $46.6 million to counterparty deposit liability representing the cash collateral received and corresponding obligation to return the cash collateral, respectively. The cash was deposited into a separate custodial account for which the Company is not entitled to the interest earned on the cash collateral.
Foreign Currency Forward Contracts
The Company has established a currency risk management program. The objective of the program is to mitigate the foreign exchange rate risk arising from transactions or cash flows that have a direct or underlying exposure in non-U.S. dollar denominated currencies in order to reduce volatility in the Company’s cash flow, which may have an adverse impact to our short-term liquidity or financial condition. A majority of the Company’s power sale agreements and operating expenditures are transacted in U.S. dollars, with a growing portion transacted in currencies other than the U.S. dollar, primarily the Canadian dollar. The Company enters into foreign currency forward contracts at various times to mitigate the currency exchange rate risk on Canadian dollar denominated cash flows. These instruments have remaining maturities ranging from one to twenty-one months. The foreign currency forward contracts are considered non-designated derivative instruments and are not used for trading or speculative purposes. As a result, changes in fair value and settlements are recorded in gain (loss) on undesignated derivatives, net in the consolidated statements of operations.