EX-99.1 2 a2018q2-exhibit991xunaudit.htm EXHIBIT 99.1 UNAUDITED FINANCIAL STATEMENTS Exhibit
Unaudited Interim Consolidated Financial Statements of
Algonquin Power & Utilities Corp.
For the three and six months ended June 30, 2018 and 2017



Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Balance Sheets

(thousands of U.S. dollars)
 
 
 
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
37,808

 
$
43,484

Accounts receivable, net (note 4)
205,122

 
244,617

Fuel and natural gas in storage
35,080

 
44,414

Supplies and consumables inventory
50,277

 
45,074

Regulatory assets (note 5)
66,150

 
66,567

Prepaid expenses
26,405

 
31,005

Derivative instruments (note 20)
9,801

 
16,099

Other assets
5,080

 
7,110

 
435,723

 
498,370

Property, plant and equipment, net
6,307,525

 
6,304,897

Intangible assets, net
51,157

 
51,103

Goodwill
954,282

 
954,282

Regulatory assets (note 5)
378,452

 
376,800

Derivative instruments (note 20)
55,717

 
54,115

Long-term investment carried at fair value (note 6)
505,596

 
—

Long-term investments (note 6)
134,936

 
67,331

Deferred income taxes (note 15)
64,722

 
61,357

Restricted cash
18,590

 
15,939

Other assets
13,974

 
13,214

 
$
8,920,674

 
$
8,397,408




Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Balance Sheets

(thousands of U.S. dollars)
 
 
 
 
June 30, 2018
 
December 31, 2017
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
55,530

 
$
119,887

Accrued liabilities
167,569

 
280,144

Dividends payable (note 12)
62,472

 
50,445

Regulatory liabilities (note 5)
50,166

 
37,687

Long-term debt (note 7)
13,148

 
12,364

Other long-term liabilities (note 9)
39,580

 
45,903

Derivative instruments (note 20)
12,576

 
14,126

Other liabilities
3,503

 
3,474

 
404,544

 
564,030

Long-term debt (note 7)
3,434,341

 
3,067,187

Regulatory liabilities (note 5)
567,621

 
540,278

Deferred income taxes (note 15)
421,427

 
399,148

Derivative instruments (note 20)
69,078

 
54,818

Pension and other post-employment benefits obligation (note 8)
167,649

 
168,189

Other long-term liabilities (note 9)
229,244

 
228,238

Preferred shares, Series C
13,089

 
13,867

 
4,902,449

 
4,471,725

Redeemable non-controlling interest
36,120

 
41,553

Equity:
 
 
 
Preferred shares
184,299

 
184,299

Common shares (note 10(a))
3,397,106

 
3,021,699

Additional paid-in capital
41,148

 
38,569

Deficit
(566,758
)
 
(524,311
)
Accumulated other comprehensive loss (note 11)
(5,116
)
 
(2,792
)
Total equity attributable to shareholders of Algonquin Power & Utilities Corp.
3,050,679

 
2,717,464

Non-controlling interests
526,882

 
602,636

Total equity
3,577,561

 
3,320,100

Commitments and contingencies (note 18)

 

Subsequent events (notes 7(a),(d) and 20(b)(ii))

 

 
$
8,920,674

 
$
8,397,408

See accompanying notes to unaudited interim consolidated financial statements



Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Statements of Operations
(thousands of U.S. dollars, except per share amounts)
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
Revenue
 
 
 
 
 
 
 
Regulated electricity distribution
$
199,763

 
$
177,674

 
$
412,468

 
$
359,125

Regulated gas distribution
74,862

 
63,114

 
257,493

 
211,354

Regulated water reclamation and distribution
33,522

 
37,877

 
61,114

 
70,323

Non-regulated energy sales
53,047

 
54,305

 
120,888

 
108,509

Other revenue
5,045

 
4,153

 
9,113

 
9,487

 
366,239

 
337,123

 
861,076

 
758,798

Expenses
 
 
 
 
 
 
 
Operating expenses
120,262

 
118,575

 
241,384

 
228,594

Regulated electricity purchased
63,120

 
50,973

 
134,026

 
105,620

Regulated gas purchased
23,667

 
16,396

 
114,072

 
77,980

Regulated water purchased
2,282

 
2,410

 
4,330

 
4,420

Non-regulated energy purchased
4,523

 
3,716

 
13,454

 
9,242

Administrative expenses
13,563

 
12,324

 
26,147

 
23,429

Depreciation and amortization
64,781

 
62,697

 
133,430

 
125,194

Gain on foreign exchange
(1,272
)
 
(2,933
)
 
(1,071
)
 
(2,975
)
 
290,926

 
264,158

 
665,772

 
571,504

Operating income
75,313

 
72,965

 
195,304

 
187,294

Interest expense on long-term debt and others
38,429

 
37,187

 
73,929

 
72,656

Interest expense on convertible debentures and amortization of acquisition financing
—

 
—

 
—

 
13,383

Change in value of investment carried at fair value (note 6(a))
(15,033
)
 
—

 
101,971

 
—

Interest, dividend, equity and other income (note 6)
(10,892
)
 
(2,063
)
 
(21,553
)
 
(4,541
)
Pension and post-employment non-service costs (note 8)
616

 
2,289

 
1,047

 
4,829

Other gains
(386
)
 
(3,701
)
 
(1,614
)
 
(3,683
)
Acquisition-related costs
1,058

 
68

 
8,644

 
45,873

Loss (gain) on derivative financial instruments (note 20(b)(iv))
55

 
(12
)
 
172

 
1,212

 
13,847

 
33,768

 
162,596

 
129,729

Earnings before income taxes
61,466

 
39,197

 
32,708

 
57,565

Income tax expense (note 15)
 
 
 
 
 
 
 
Current
2,498

 
3,794

 
5,384

 
5,744

Deferred
4,328

 
13,820

 
34,498

 
26,227

 
6,826

 
17,614

 
39,882

 
31,971

Net earnings (loss)
54,640

 
21,583

 
(7,174
)
 
25,594

Net effect of non-controlling interests (note 14)
10,822

 
13,737

 
90,234

 
29,022

Net earnings attributable to shareholders of Algonquin Power & Utilities Corp.
$
65,462

 
$
35,320

 
$
83,060

 
$
54,616

Series A and D Preferred shares dividend (note 12)
2,014

 
1,933

 
4,070

 
3,899

Net earnings attributable to common shareholders of Algonquin Power & Utilities Corp.
$
63,448

 
$
33,387

 
$
78,990

 
$
50,717

Basic net earnings per share (note 16)
$
0.14

 
$
0.09

 
$
0.18

 
$
0.14

Diluted net earnings per share (note 16)
$
0.14

 
$
0.09

 
$
0.17

 
$
0.14

See accompanying notes to unaudited interim consolidated financial statements



Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Statements of Comprehensive Income
 
(thousands of U.S. dollars)
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
Net earnings (loss)
$
54,640

 
$
21,583

 
$
(7,174
)
 
$
25,594

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax recovery of $1178 and $878 (2017 - tax recovery of $nil and $nil), respectively (notes 20(b)(iii) and 20(b)(iv))
(10,370
)
 
(5,036
)
 
(12,816
)
 
(33,696
)
Change in fair value of cash flow hedges, net of tax expense of $1,701 and $306 (2017 - tax recovery of $1,926 and expense of $766), respectively (note 20(b)(ii))
4,554

 
(2,728
)
 
803

 
1,251

Change in value of available-for-sale investments
—

 
(19
)
 
—

 
(19
)
Change in pension and other post-employment benefits, net of tax recovery of $19 and $56 (2017 - tax expense of $883 and $910), respectively (note 8)
(180
)
 
1,426

 
(282
)
 
1,475

Other comprehensive loss, net of tax
(5,996
)
 
(6,357
)
 
(12,295
)
 
(30,989
)
Comprehensive gain (loss)
48,644

 
15,226

 
(19,469
)
 
(5,395
)
Comprehensive loss attributable to the non-controlling interests
(10,812
)
 
(13,737
)
 
(90,247
)
 
(29,022
)
Comprehensive income attributable to shareholders of Algonquin Power & Utilities Corp.
$
59,456

 
$
28,963

 
$
70,778

 
$
23,627

See accompanying notes to unaudited interim consolidated financial statements



Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Statement of Equity

 
(thousands of U.S. dollars)
For the six months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Algonquin Power & Utilities Corp. Shareholders
 
 
 
 
 
Common
shares
 
Preferred
shares
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
OCI
 
Non-
controlling
interests
 
Total
Balance, December 31, 2017
$
3,021,699

 
$
184,299

 
$
38,569

 
$
(524,311
)
 
$
(2,792
)
 
$
602,636

 
$
3,320,100

Cumulative catch-up adjustment related to Adoption of Topic 606 on revenue (note 2(a))
—

 
—

 
—

 
1,860

 
—

 
—

 
1,860

Cumulative catch-up adjustment related to adoption of ASU 2018-02 on tax effects in AOCI (note 2(a))
—

 
—

 
—

 
(9,958
)
 
9,958

 
—

 
—

Net earnings (loss)
—

 
—

 
—

 
83,060

 
—

 
(90,234
)
 
(7,174
)
Redeemable non-controlling interests not included in equity
—

 
—

 
—

 
—

 
—

 
5,015

 
5,015

Other comprehensive loss
—

 
—

 
—

 
—

 
(12,282
)
 
(13
)
 
(12,295
)
Dividends declared and distributions to non-controlling interests
—

 
—

 
—

 
(90,697
)
 
—

 
(4,378
)
 
(95,075
)
Dividends and issuance of shares under dividend reinvestment plan
24,732

 
—

 
—

 
(24,732
)
 
—

 
—

 
—

Common shares issued pursuant to public offering, net of costs (note 10(a))
346,178

 
—

 
—

 
—

 
—

 
—

 
346,178

Common shares issued upon conversion of convertible debentures
302

 
—

 
—

 
—

 
—

 
—

 
302

Common shares issued pursuant to share-based awards (note 10(b))
4,195

 
—

 
(2,671
)
 
(1,980
)
 
—

 
—

 
(456
)
Share-based compensation (note 10(b))
—

 
—

 
5,250

 
—

 
—

 
—

 
5,250

Contributions received from non-controlling interests
—

 
—

 
—

 
—

 
—

 
13,856

 
13,856

Balance, June 30, 2018
$
3,397,106

 
$
184,299

 
$
41,148

 
$
(566,758
)
 
$
(5,116
)
 
$
526,882

 
$
3,577,561

See accompanying notes to unaudited interim consolidated financial statements




Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Statements of Cash Flows
(thousands of U.S. dollars)
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
Cash provided by (used in):
 
 
 
 
 
 
 
Operating Activities
 
 
 
 
 
 
 
Net earnings (loss)
$
54,640

 
$
21,583

 
$
(7,174
)
 
$
25,594

Adjustments and items not affecting cash:
 
 
 
 
 
 
 
Depreciation and amortization
68,371

 
60,345

 
137,711

 
128,429

Deferred taxes
4,328

 
13,820

 
34,498

 
26,227

Unrealized loss (gain) on derivative financial instruments
(5,059
)
 
454

 
(2,183
)
 
2,236

Share-based compensation expense
2,037

 
1,645

 
3,615

 
3,426

Cost of equity funds used for construction purposes
(724
)
 
(436
)
 
(1,377
)
 
(851
)
Change in value of investment carried at fair value
(15,033
)
 
—

 
101,971

 
—

Pension and post-employment contributions in excess of expense
195

 
(6,213
)
 
3,338

 
4,322

Distributions received from equity investments, net of income
1,713

 
1,387

 
1,266

 
280

Other
(192
)
 
(3,667
)
 
(1,409
)
 
(3,873
)
Changes in non-cash operating items (note 19)
22,977

 
(34,085
)
 
(39,991
)
 
(75,462
)
 
133,253

 
54,833

 
230,265

 
110,328

Financing Activities
 
 
 
 
 
 
 
Increase in long-term debt
168,786

 
171,935

 
1,003,204

 
1,134,249

Decrease in long-term debt
(539,928
)
 
(355,692
)
 
(602,733
)
 
(1,803,443
)
Issuance of convertible debentures, net of costs
—

 
282

 
—

 
571,944

Cash dividends on common shares
(36,582
)
 
(37,306
)
 
(76,062
)
 
(60,148
)
Dividends on preferred shares
—

 
(1,933
)
 
(2,056
)
 
(3,899
)
Contributions from non-controlling interests
—

 
166,153

 
—

 
206,877

Production-based cash contributions from non-controlling interest
2,593

 
1,114

 
13,856

 
7,930

Distributions to non-controlling interests
(1,846
)
 
(895
)
 
(4,352
)
 
(1,049
)
Issuance of common shares, net of costs
346,956

 
51

 
347,285

 
87

Proceeds from settlement of derivative assets
—

 
36,676

 
—

 
36,676

Proceeds from exercise of share options
—

 
—

 
—

 
9,563

Shares surrendered to fund withholding taxes on exercised share options
(1,230
)
 
(3,222
)
 
(1,557
)
 
(3,222
)
Increase in other long-term liabilities
5,164

 
4,589

 
7,267

 
11,849

Decrease in other long-term liabilities
(8,909
)
 
(2,083
)
 
(12,084
)
 
(4,785
)
 
(64,996
)
 
(20,331
)
 
672,768

 
102,629

Investing Activities
 
 
 
 

 

Acquisitions of operating entities
—

 
—

 
—

 
(1,519,923
)
Divestiture of operating entity
—

 
83,863

 
—

 
83,863

Additions to property, plant and equipment
(83,096
)
 
(142,769
)
 
(241,270
)
 
(298,657
)
Decrease (increase) in other assets
436

 
(1,506
)
 
1,009

 
(2,063
)
Increase in long-term investments
(13,122
)
 
(10,588
)
 
(668,309
)
 
(25,626
)
Proceeds from sale of long-lived assets
(24
)
 
—

 
3,004

 
—

 
(95,806
)
 
(71,000
)
 
(905,566
)
 
(1,762,406
)
Effect of exchange rate differences on cash and restricted cash
(215
)
 
129

 
(492
)
 
30

Decrease in cash, cash equivalents and restricted cash
(27,764
)
 
(36,369
)
 
(3,025
)
 
(1,549,419
)
Cash, cash equivalents and restricted cash, beginning of period
84,162

 
78,221

 
59,423

 
1,591,271

Cash, cash equivalents and restricted cash, end of period
$
56,398

 
$
41,852

 
$
56,398

 
$
41,852

 
 
 
 
 
 
 
 


Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Statements of Cash Flows


Supplemental disclosure of cash flow information:
(thousands of U.S. dollars)

2018
 
2017
 
2018
 
2017
Cash paid during the period for interest expense
$
44,044

 
$
19,778

 
$
77,643

 
$
68,025

Cash paid during the period for income taxes
$
3,312

 
$
2,621

 
$
4,536

 
$
3,955

Non-cash financing and investing activities:
 
 
 
 
 
 
 
Property, plant and equipment acquisitions in accruals
$
25,569

 
$
80,485

 
$
25,569

 
$
80,485

Sale of property, plant and equipment in exchange of note receivable
$
14,657

 
$
—

 
$
14,657

 
$
—

Issuance of common shares under dividend reinvestment plan and share-based compensation plans
$
13,880

 
$
10,816

 
$
27,867

 
$
29,930

Issuance of common shares upon conversion of convertible debentures
$
150

 
$
1,490

 
$
317

 
$
844,659

See accompanying notes to unaudited interim consolidated financial statements

Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

Algonquin Power & Utilities Corp. (“APUC” or the “Company”) is an incorporated entity under the Canada Business Corporations Act. APUC's operations are organized across two primary North American business units consisting of the Liberty Power Group and the Liberty Utilities Group. The Liberty Power Group ("Liberty Power Group") owns and operates a diversified portfolio of non-regulated renewable and thermal electric generation utility assets; the Liberty Utilities Group ("Liberty Utilities Group") owns and operates a portfolio of regulated electric, natural gas, water distribution and wastewater collection utility systems and transmission operations. APUC also owns a 25% equity interest in Atlantica Yield plc ("Atlantica") (NYSE: AY), a company that acquires, owns and manages a diversified international portfolio of contracted renewable energy, power generation, electric transmission and water assets.
1.Significant accounting policies
(a)
Basis of preparation
The accompanying unaudited interim consolidated financial statements and notes have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and Article 10 of Regulation S-X provided by the U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, the unaudited interim consolidated financial statements include all adjustments that are of a recurring nature and necessary for a fair presentation of the results of interim operations.
The significant accounting policies applied to these unaudited interim consolidated financial statements of APUC are consistent with those disclosed in the consolidated financial statements of APUC for the year ended December 31, 2017, except for adopted accounting policies described in note 2(a).
The reporting currency used to prepare these unaudited interim consolidated financial statements and notes is the U.S. dollar. The comparative 2017 unaudited interim financial statements were translated as if the U.S. dollar had been used as the reporting currency since the beginning of 2015. Amounts denominated in Canadian dollars within the notes to these unaudited interim consolidated financial statements are denoted with "C$" immediately prior to the stated amount. The Company believes that the change in reporting currency in the first quarter of 2018 to U.S. dollars will provide more relevant information for the users of the unaudited interim financial statements as over 90% of the Company's consolidated revenues and assets are derived from operations in the United States.
The Company’s Canadian operations are determined to have the Canadian dollar as their functional currency since the preponderance of operating, financing and investing transactions are denominated in Canadian dollars. The financial statements of these operations are translated into U.S. dollars using the current rate method, whereby assets and liabilities are translated at the rate prevailing at the balance sheet date, and revenue and expenses are translated using average rates for the period. Unrealized gains or losses arising as a result of the translation of the financial statements of these entities are reported as a component of other comprehensive income (loss) ("OCI") and are accumulated in a component of equity on the consolidated balance sheets, and are not recorded in income unless there is a complete or substantially complete sale or liquidation of the investment.
(b)     Seasonality
APUC's operating results are subject to seasonal fluctuations that could materially impact quarter-to-quarter operating results and, thus, one quarter's operating results are not necessarily indicative of a subsequent quarter's operating results. Where decoupling mechanisms exist, total volumetric revenue is prescribed by the Regulator and is not affected by usage. APUC's different electrical distribution utilities can experience higher or lower demand in the summer or winter depending on the specific regional weather and industry characteristics. During the winter period, natural gas distribution utilities experience higher demand than during the summer period. APUC’s water and wastewater utility assets’ revenues fluctuate depending on the demand for water, which is normally higher during drier and hotter months of the summer. APUC’s hydroelectric energy assets are primarily “run-of-river” and as such fluctuate with the natural water flows. During the winter and summer periods, flows are generally slower, while during the spring and fall periods flows are heavier. For APUC's wind energy assets, wind resources are typically stronger in spring, fall and winter and weaker in summer. APUC's solar energy assets experience greater insolation in summer, weaker in winter.

Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

1.Significant accounting policies (continued)
(c)Revenue recognition
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which was adopted on January 1, 2018 using the modified retrospective method, applied to contracts that are not completed at the date of initial application. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605. The adoption of the new standard resulted in an adjustment of $2,488 or $1,860 net of taxes to increase opening retained earnings for previously deferred revenue related to the Empire fiber business.
Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
Refer to note 17 - Segmented information for details of revenue disaggregation by business units.
Liberty Utilities Group revenue
Liberty Utilities Group revenues consist primarily of the distribution of electricity, natural gas, and water.
Revenues related to utility electricity and natural gas sales and distribution are recognized over time as the energy is delivered. At the end of each month, the electricity and natural gas delivered to the customers from the date of their last meter read to the end of the month is estimated and the corresponding unbilled revenue is recorded. These estimates of unbilled revenue and sales are based on the ratio of billable days versus unbilled days, amount of electricity or natural gas procured during that month, historical customer class usage patterns, weather, line loss, unaccounted-for gas and current tariffs. Unbilled receivables are typically billed within the next month. Some customers elect to pay their bill on an equal monthly plan. As a result, in some months cash is received in advance of the delivery of electricity. Deferred revenue is recorded for that amount. The amount of revenue recognized in the period from the balance of deferred revenue is not significant.
Water reclamation and distribution revenues are recognized over time when water is processed or delivered to customers. At the end of each month, the water delivered and wastewater collected from the customers from the date of their last meter read to the end of the month is estimated and the corresponding unbilled revenue is recorded. These estimates of unbilled revenue are based on the ratio of billable days versus unbilled days, amount of water procured and collected during that month, historical customer class usage patterns and current tariffs. Unbilled receivables are typically billed within the next month.
The majority of Liberty Utilities Group's contracts have a single performance obligation that represents a promise to transfer to the customer a series of distinct goods that are substantially the same and that have the same pattern of transfer to the customer. The Company’s performance obligation is satisfied over time as electricity, natural gas or water is delivered.
On occasion, a utility is permitted to implement new rates that have not been formally approved by the regulatory commission, which are subject to refund. The Company recognizes revenue based on the interim rate and if needed, establishes a reserve for amounts that could be refunded based on experience for the jurisdiction in which the rates were implemented.
Revenue for certain of the Company’s regulated utilities is subject to alternative revenue programs approved by their respective regulators, which require to charge approved annual delivery revenue on a systematic basis over the fiscal year. As a result, the difference between delivery revenue calculated based on metered consumption and approved delivery revenue is disclosed as alternative revenue in note 17 - Segmented information and is recorded as a regulatory asset or liability to reflect future recovery or refund, respectively, from customers (note 5). The amount subsequently billed to customers is recorded as a recovery of the regulatory asset.



Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

1.Significant accounting policies (continued)
(c)Revenue recognition (continued)
Liberty Power Group revenue
Liberty Power Group's revenues consist primarily of the sale of electricity, capacity, and renewable energy credits.
Revenues related to the sale of electricity are recognized over time as the electricity is delivered. The electricity represents a single performance obligation that represents a promise to transfer to the customer a series of distinct goods that are substantially the same and that have the same pattern of transfer to the customer.
Progress towards satisfaction of the single performance obligation is measured using an output method based on units produced and delivered within the production month.
Revenues related to the sale of capacity are recognized over time as the capacity is provided. The nature of the promise to provide capacity is that of a stand-ready obligation. The capacity is generally expressed in monthly volumes and prices. The capacity represents a single performance obligation that represents a promise to transfer to the customer a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer. Progress towards satisfaction of the single performance obligation is measured using an output method based on time elapsed.
Qualifying renewable energy projects receive renewable energy credits ("REC") and solar renewable energy credits (“SRECs”) for the generation and delivery of renewable energy to the power grid. The energy credit certificates represent proof that 1 MW of electricity was generated from an eligible energy source. The REC and SREC can be traded and the owner of the REC or SREC can claim to have purchased renewable energy. RECs and SRECs are primarily sold under fixed contracts, and revenue for these contracts is recognized at a point in time, upon generation of the associated electricity. Any REC's or SRECs generated above contracted amounts are held in inventory, with the offset recorded as a decrease in operating expenses.
The majority of Liberty Power Group's contracts with customers are bundled arrangements of multiple performance obligations: electricity, capacity, and renewable energy credits (RECs).
The Company has elected to apply the invoicing practical expedient to the electricity and capacity in Liberty Power contracts. The Company does not disclose the value of unsatisfied performance obligations for these contracts as revenue is recognized at the amount to which the Company has the right to invoice for services performed.
Revenue is recorded net of sales taxes.
2.     Recently issued accounting pronouncements
(a)
Recently adopted accounting pronouncements
The Financial Accounting Standards Board ("FASB") issued ASU 2018-09, Codification Improvements to clarify the Codification and correct unintended application of guidance that is not expected to have a significant impact on current accounting practice. The adoption of this ASU in the second quarter of 2018 had no impact on the Company's unaudited interim consolidated financial statements.
The Financial Accounting Standards Board ("FASB") issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities to clarify the codification and to correct unintended application of the guidance. The Company has early adopted this pronouncement as of January 1, 2018, concurrent with the adoption of ASU 2016-01. The adoption of this update in the first quarter of 2018 had no impact on the Company's unaudited interim consolidated financial statements.
The FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI") to allow a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company has early adopted this pronouncement as of January 1, 2018, and as a result, a net amount of $9,958 was reclassified out of AOCI and recorded as an increase to accumulated deficit as at that date.


Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

2.     Recently issued accounting pronouncements (continued)
(a)
Recently adopted accounting pronouncements (continued)
The FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The adoption of this update in the first quarter of 2018 had no impact on the Company's unaudited interim consolidated financial statements.
The FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost, to improve the reporting of defined benefit pension cost and post-retirement benefit cost ("net benefit cost") in the financial statements. This update requires the service cost component to be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The update also only allows the service cost component to be eligible for capitalization when applicable. The Company adopted this guidance effective January 1, 2018. The Company's regulated operations only capitalize the service costs component and therefore no regulatory to U.S. GAAP reporting differences exist. The Company applied the practical expedient for retrospective application on the statement of operations (note 8).
The FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Non-financial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The update clarifies the scope of the standard as well as provides additional guidance on partial sales of non-financial assets. The adoption of this update in the first quarter of 2018 had no impact on the Company's unaudited interim consolidated financial statements.
The FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The update is intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company follows the pronouncements of this update as of January 1, 2018. The adoption of this update in the first quarter of 2018 had no impact on the Company's unaudited interim consolidated financial statements.
The FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash to eliminate current diversity in practice in the classification and presentation of changes in restricted cash on the statement of cash flows. Prior to the adoption of this update, the Company presented changes in restricted cash as investing activities on the consolidated statement of cash flows.
The FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new standard requires the recognition of current and deferred income taxes for an intra-entity transfer of an asset other than inventory. The adoption of this update in the first quarter of 2018 had no impact on the Company's unaudited interim consolidated financial statements.
The FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments in order to eliminate current diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The adoption of this update in the first quarter of 2018 had no impact on the Company's unaudited interim consolidated financial statements.
The FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities to simplify the measurement, presentation, and disclosure of financial instruments. The adoption of this update in the first quarter of 2018 had no significant impact on the Company's unaudited interim consolidated financial statements.





Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

2.     Recently issued accounting pronouncements (continued)
(b)
Recently issued accounting guidance not yet adopted
The FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. This update changes the measurement basis and date of non-employee share-based payment awards and also makes amendments to how to measure non-employee awards with performance conditions. The update is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. No impact on the consolidated financial statements is expected from the adoption of this update.
The FASB issued ASU 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations utilizing leases. This ASU requires lessees to recognize the assets and liabilities arising from all leases on the balance sheet, but the effect of leases in the statement of operations and the statement of cash flows is largely unchanged. The FASB issued an amendment to ASC Topic 842 that permits companies to elect an optional transition practical expedient to not evaluate existing land easements under the new standard if the land easements were not previously accounted for under existing lease guidance. The FASB also voted to amend ASC Topic 842 to allow companies to elect not to restate their comparative periods in the period of adoption when transitioning to the standard. The FASB issued further codification improvements to ASC Topic 842 to correct and clarify specific aspects of the guidance. The standard is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted.
The Company is in the process of evaluating the impact of adoption of this standard on its financial statements and disclosures. The Company has identified all contracts that may have potential leasing implications and is finalizing the analysis of the terms and conditions. The Company is now in the process of measuring the financial impacts under the requirements of this new standard. The Company continues to monitor FASB amendments to ASC Topic 842.
3.
Business acquisitions and development projects
(a)
Great Bay Solar Facility
In March 2018, the Company placed in service a 75 MWac solar powered generating facility in Somerset County, Maryland. Commercial operations as defined by the power purchase agreement was reached on March 29, 2018.
The Great Bay Solar Facility is controlled by a subsidiary of APUC (Great Bay Holdings, LLC). The Class A partnership units are owned by a third-party tax equity investor who funded $42,750 in 2017 with the remaining expected to be received in late 2018. Through its partnership interest, the tax equity investor will receive the majority of the tax attributes associated with the project. The Company accounts for this interest as "Non-controlling interest" on the unaudited interim consolidated balance sheets.
(b)
Acquisition of the St. Lawrence Gas Company, Inc.
On August 31, 2017, the Company entered into a definitive agreement to acquire St. Lawrence Gas Company, Inc. ("SLG"). SLG is a rate-regulated natural gas distribution utility serving customers in northern New York state. The total purchase price for the transaction is $70,000, less total third-party debt of SLG outstanding at closing, and subject to customary working capital adjustments. Closing of the transaction remains subject to regulatory approval and other closing conditions and is expected to occur in early 2019.
(c)
Approval to acquire the Perris Water Distribution System
On August 10, 2017, the Company’s board approved the acquisition of two water distribution systems serving customers from the City of Perris, California.  The anticipated purchase price of $11,500 is expected to be established as rate base during the regulatory approval process.  The City of Perris residents voted to approve the sale on November 7, 2017. Liberty Utilities Group filed an application requesting approval for the acquisition of the assets of the water utilities with the California Public Utility Commission on May 8, 2018. Final approval is expected in Q1 2019.




Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

4.
Accounts receivable
Accounts receivable as of June 30, 2018 include unbilled revenue of $44,097 (December 31, 2017 - $78,289) from the Company’s regulated utilities. Accounts receivable as of June 30, 2018 are presented net of allowance for doubtful accounts of $6,968 (December 31, 2017 - $5,555).
5.
Regulatory matters
The Company’s regulated utility operating companies are subject to regulation by the public utility commissions of the states in which they operate. The respective public utility commissions have jurisdiction with respect to rate, service, accounting policies, issuance of securities, acquisitions and other matters. These utilities operate under cost-of-service regulation as administered by these state authorities. The Company’s regulated utility operating companies are accounted for under the principles of ASC Topic 980, Regulated Operations (“ASC 980”). Under ASC 980, regulatory assets and liabilities that would not be recorded under U.S. GAAP for non-regulated entities are recorded to the extent that they represent probable future revenue or expenses associated with certain charges or credits that will be recovered from or refunded to customers through the rate-setting process.
At any given time, the Company can have several regulatory proceedings underway. The financial effects of these proceedings are reflected in the unaudited interim consolidated financial statements based on regulatory approval obtained to the extent that there is a financial impact during the applicable reporting period. The following regulatory proceedings were recently completed:
Utility
State
Regulatory proceeding type
Annual revenue increase
Effective date
EnergyNorth Gas System
New Hampshire
General Rate Case
$10,711
May 1, 2018 with a one time recoupment of $1,326 for the difference between the final rates and temporary rates granted on July 1, 2017
Missouri Gas System
Missouri
General Rate Case
$4,600
Effective July 1, 2018
New England Natural Gas System
Massachusetts
Gas System Enhancement Plan
$3,676
Effective May 1, 2018



Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

5.
Regulatory matters (continued)
Regulatory assets and liabilities consist of the following: 
 
June 30, 2018
 
December 31, 2017
Regulatory assets
 
 
 
Environmental remediation
$
82,154

 
$
82,711

Pension and post-employment benefits
105,561

 
105,712

Debt premium
52,185

 
57,406

Fuel and commodity costs adjustment
32,935

 
34,525

Rate adjustment mechanism
35,370

 
35,813

Clean Energy and other customer programs
21,059

 
20,582

Deferred construction costs
14,165

 
14,344

Asset retirement
18,597

 
16,080

Income taxes
32,905

 
36,546

Rate case costs
9,250

 
9,295

Other
40,421

 
30,353

Total regulatory assets
$
444,602

 
$
443,367

Less: current regulatory assets
(66,150
)
 
(66,567
)
Non-current regulatory assets
$
378,452

 
$
376,800

 
 
 
 
Regulatory liabilities
 
 
 
Income taxes
$
335,687

 
$
321,138

Cost of removal
190,697

 
184,188

Rate-base offset
12,058

 
13,214

Fuel and commodity costs adjustment
33,822

 
23,543

Deferred compensation received in relation to lost production
8,154

 
9,398

Deferred construction costs - fuel related
7,338

 
7,418

Pension and post-employment benefits
15,480

 
10,082

Other
14,551

 
8,984

Total regulatory liabilities
$
617,787

 
$
577,965

Less: current regulatory liabilities
(50,166
)
 
(37,687
)
Non-current regulatory liabilities
$
567,621

 
$
540,278

On June 1, 2018, the state of Missouri enacted legislation that, effective for tax years beginning on or after January 1, 2020, reduces the corporate income tax rate from 6.25% to 4%, among other legislative changes. A reduction of regulatory asset and an increase to regulatory liability was recorded for excess deferred taxes probable of being refunded to customers of $17,350.
As a result of the U.S. Tax Cuts and Jobs Act of 2017 (the "Tax Act") being enacted in 2017, regulators in the states where Liberty Utilities Group operates are contemplating the ratemaking implications of the reduction of federal tax rates from the legacy 35% tax rate and the new 21% federal statutory income tax rate effective January 2018. The Company is working with the regulators to identify the most appropriate way in each jurisdiction to address the impact of the Tax Act on cost of service based rates. In Q2 2018, impact on revenues on account of ordered or probable orders related to the Tax Act was immaterial.



Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

6.
Long-term investments
Long-term investments consist of the following:
 
June 30, 2018
 
December 31, 2017
Long-term investment carried at fair value
 
 
 
Atlantica (a)
$
505,596

 
$
—

Equity-method investees
 
 
 
Red Lily I Wind Facility
16,945

 
18,174

AAGES (a)
4,542

 
—

Amherst Island Wind Project (b)
8,867

 
8,921

Other
3,755

 
5,172

 
34,109

 
32,267

Notes receivable
 
 
 
Development loans (c)
96,367

 
30,060

Other
2,853

 
3,318

 
99,220

 
33,378

Other investments
1,607

 
1,686

Total long-term investments
640,532

 
67,331

Amounts recognized on the unaudited interim consolidated balance sheets consist of:
 
 
 
Long-term investment carried at fair value
$
505,596

 
$
—

Long-term investments
134,936

 
67,331

Total long-term investments
$
640,532

 
$
67,331

(a)Investment in joint ventures with Abengoa and investment in Atlantica
On March 9, 2018 and May 25, 2018, APUC and Abengoa, S.A ("Abengoa") created Abengoa-Algonquin Global Energy Solutions B.V. and AAGES Development Canada Inc. (collectively "AAGES") to identify, develop, and construct clean energy and water infrastructure assets with a global focus. As at June 30, 2018, Abengoa-Algonquin Global Energy Solutions B.V. and AAGES Development Canada had outstanding capital of $4,750 and $250, respectively, to each of the two shareholders. APUC and Abengoa have joint control and all decisions must be unanimous. As such, the Company is accounting for its investment in the joint ventures under the equity method.
On March 9, 2018, APUC purchased from Abengoa a 25% equity interest in Atlantica for a total purchase price of $607,567, based on a price of $24.25 per ordinary share of Atlantica plus a contingent payment of up to $0.60 per-share payable two years after closing, subject to certain conditions. The Company transferred the Atlantica shares to a new entity controlled and consolidated by APUC. The Company has elected the fair value option under ASC 825, Financial Instruments to account for its investment in Atlantica, with changes in fair value reflected in the unaudited interim consolidated statement of operations. On March 9, 2018, the difference between the purchase price and the value of the Atlantica shares based on the NASDAQ share price resulted in an immediate fair value loss of $117,254 while gains of $15,033 and $15,283 were recorded for the three and six-month periods from acquisition to June 30, 2018 respectively. The Company also recorded dividend income of $8,017 and $15,784 from the Atlantica shares during the three and six-month periods from acquisition to June 30, 2018, respectively.
In April 2018, APUC entered into an agreement to acquire an additional 16.5% of equity interest in Atlantica from Abengoa for a purchase price of approximately $345,000, based on a price of $20.90 per ordinary share. The transaction is expected to close in the third quarter of 2018, subject to certain governmental approvals and other closing conditions.

Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

6.
Long-term investments (continued)
(b)Amherst Island Wind Project
APUC has a 50% interest in Windlectric Inc. ("Windlectric"), which owns a 75 MW construction-stage wind development project (“Amherst Island Wind Project”) in the province of Ontario. The Company holds an option to acquire the remaining common shares at a fixed price any time prior to January 15, 2019. Construction was completed during the second quarter of 2018 and sale of power under the power purchase agreement has started.
Windlectric is considered a variable interest entity ("VIE") namely due to the low level of equity at risk. The Company is not considered the primary beneficiary of Windlectric as the two shareholders have joint control and all decisions must be unanimous. As such, the Company accounts for its investment in the joint venture under the equity method. The interest capitalized during the three and six months ended June 30, 2018 to the investment while the Amherst Island Wind Project was under construction amounted to $517 and $739 (2017 - $242 and $418), respectively. As at June 30, 2018, the third-party construction debt of the joint venture was C$207,410 (December 31, 2017 - C$133,765).
(c)
Development loans
As at June 30, 2018, the Company has a loan and credit support facility with Windlectric. During construction, the Company is obligated to provide cash advances and credit support (in the form of letters of credit, escrowed cash, or guarantees) in amounts necessary for the continued development and construction of the equity investee's wind project.
No interest revenue is accrued on the loans.
7.
Long-term debt
Long-term debt consists of the following:
Borrowing type
 
Weighted average coupon
 
Maturity
 
Par value
 
June 30, 2018
 
December 31, 2017
Senior Unsecured Revolving Credit Facilities (a)
 
—

 
2018-2023
 
N/A

 
$
81,982

 
$
51,827

Senior Unsecured Bank Credit Facilities (b)
 
—

 
2018-2019
 
N/A

 
602,500

 
134,988

Commercial Paper
 
—

 
2023
 
N/A

 
6,250

 
5,576

U.S. Dollar Borrowings
 
 
 
 
 
 
 
 
 
 
Senior Unsecured Notes
 
4.09
%
 
2020-2047
 
$
1,225,000

 
1,218,239

 
1,217,797

Senior Unsecured Utility Notes
 
5.99
%
 
2020-2035
 
$
222,000

 
240,929

 
246,560

Senior Secured Utility Bonds (c)
 
4.75
%
 
2020-2044
 
$
662,500

 
678,867

 
772,871

Canadian Dollar Borrowings
 
 
 
 
 
 
 
 
 
 
Senior Unsecured Notes (d)
 
4.61
%
 
2018-2027
 
C$
785,669

 
594,105

 
623,223

Senior Secured Project Notes
 
10.26
%
 
2020-2027
 
C$
32,469

 
24,617

 
26,709

 
 
 
 
 
 
 
 
$
3,447,489

 
$
3,079,551

Less: current portion
 
 
 
 
 
 
 
(13,148
)
 
(12,364
)
 
 
 
 
 
 
 
 
$
3,434,341

 
$
3,067,187

Long-term debt issued at a subsidiary level (project notes or utility bonds) relating to a specific operating facility is generally collateralized by the respective facility with no other recourse to the Company. Long-term debt issued at a subsidiary level whether or not collateralized generally have certain financial covenants, which must be maintained on a quarterly basis. Non-compliance with the covenants could restrict cash distributions/dividends to the Company from the specific facilities.


Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

7.
Long-term debt (continued)
Short-term obligations of $570,021 that are expected to be refinanced using the long-term credit facilities are presented as long-term debt.
Recent financing activities:
(a)
Senior unsecured revolving credit facilities
On February 23, 2018, the Liberty Utilities Group increased commitments under the Liberty Credit Facility to $500,000 and extended the maturity to February 23, 2023. Concurrent with the amendment to the Liberty Credit Facility, the Liberty Utilities Group closed the Empire Credit Facility. The Liberty Credit Facility will now be used as a backstop for Empire's commercial paper program and as a source of liquidity for Empire.
On February 16, 2018, the Liberty Power Group increased availability under its revolving letter of credit facility to $200,000 and extended the maturity to January 31, 2021.
Subsequent to quarter end, the Liberty Power Group extended the maturity of its senior unsecured revolving bank credit facility from October 6, 2022 to October 6, 2023.
(b)
Senior unsecured bank credit facilities
On December 21, 2017, the Company entered into a $600,000 term credit facility with two Canadian banks maturing on December 21, 2018. On March 7, 2018, the Company drew $600,000 under this facility. As at June 30, 2018, the Company had repaid $132,500 of borrowings under this facility.
(c)    U.S. dollar senior secured utility bonds
On June 1, 2018, the Company repaid, upon its maturity, a $90,000 secured utility note.
(d)    Canadian dollar senior unsecured notes
Subsequent to quarter end, on July 25, 2018, the Company repaid, upon its maturity, a C$135,000 unsecured note.

Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

8.
Pension and other post-employment benefits
The following table lists the components of net benefit costs for the pension plans and OPEB in the unaudited interim consolidated statements of operations.
 
Pension benefits
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
Service cost
$
3,614

 
$
3,600

 
$
7,228

 
$
7,200

Interest cost
4,555

 
4,987

 
9,110

 
9,973

Expected return on plan assets
(7,005
)
 
(6,308
)
 
(14,011
)
 
(12,616
)
Amortization of net actuarial loss (gain)
111

 
267

 
223

 
535

Amortization of prior service credits
(156
)
 
(156
)
 
(311
)
 
(311
)
Loss on curtailments and settlements
—

 
—

 
—

 
1,007

Amortization of regulatory assets/liability
2,594

 
3,141

 
5,157

 
5,803

Net benefit cost
$
3,713

 
$
5,531

 
$
7,396

 
$
11,591

 
OPEB
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
Service cost
$
1,487

 
$
1,278

 
$
2,974

 
$
2,555

Interest cost
1,625

 
1,672

 
3,251

 
3,344

Expected return on plan assets
(1,849
)
 
(1,620
)
 
(3,697
)
 
(3,240
)
Amortization of net actuarial loss (gain)
(38
)
 
(36
)
 
(77
)
 
(72
)
Amortization of prior service credits
(65
)
 
(65
)
 
(131
)
 
(131
)
Amortization of regulatory assets/liability
973

 
407

 
1,534

 
537

Net benefit cost
$
2,133

 
$
1,636

 
$
3,854

 
$
2,993

As a result of the adoption of ASU 2017-07 (note 2(a)), the service cost components of pension plans and other post-employment benefits ("OPEB") are shown as part of operating expenses within operating income in the unaudited interim consolidated statements of operations. The remaining components of net benefit costs are considered non-service costs and have been included outside of operating income in pension and post-employment non-service costs in the unaudited interim consolidated statements of operations. The Company applied the practical expedient for retrospective application on the unaudited interim statement of operations and as such, the $2,289 and $4,829 of non-service costs for the three and six months ended June 30, 2017 has been reclassified from administrative expenses to pension and post-employment non-service costs.

Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

9.
Other long-term liabilities
Other long-term liabilities consist of the following: 
 
June 30, 2018
 
December 31, 2017
Advances in aid of construction
$
62,660

 
$
62,683

Environmental remediation obligation
54,911

 
54,322

Asset retirement obligations
41,215

 
44,166

Customer deposits
28,671

 
28,529

Unamortized investment tax credits
17,835

 
17,839

Deferred credits
19,122

 
21,168

Other
44,410

 
45,434

 
268,824

 
274,141

Less current portion
(39,580
)
 
(45,903
)
 
$
229,244

 
$
228,238

10.
Shareholders’ capital
(a)
Common shares
Number of common shares: 
 
 
2018
Common shares, beginning of period
 
431,765,935

Public issuance
 
37,505,274

Conversion of convertible debentures
 
38,138

Issuance of shares under the dividend reinvestment plan
 
2,532,767

Exercise of share-based awards
 
352,800

Common shares, end of period
 
472,194,914

On April 24, 2018, APUC issued 37,505,274 common shares at $9.23 (C$11.85) per share pursuant to a public offering for gross proceeds of $346,324 (C$444,437).
(b)
Share-based compensation
During the six months ended June 30, 2018, the Board of Directors of APUC (the "Board") approved the grant of 1,166,717 options to executives of the Company. The options allow for the purchase of common shares at a weighted average price of C$12.80, the market price of the underlying common share at the date of grant. One-third of the options vest on each of December 31, 2018, 2019 and 2020. Options may be exercised up to eight years following the date of grant.
The following assumptions were used in determining the fair value of share options granted: 
 
2018
Risk-free interest rate
2.1
%
Expected volatility
21
%
Expected dividend yield
4.8
%
Expected life
5.50 years

Weighted average grant date fair value per option
C$
1.41




Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

10.
Shareholders’ capital (continued)
(b)
Share-based compensation (continued)
In March 2018, executives of the Company exercised 512,367 stock options at a weighted average exercise price of $10.29 in exchange for 86,354 common shares issued from treasury, and 426,013 options were settled at their cash value as payment for the exercise price and tax withholdings related to the exercise of the options.
In March 2018, 320,806 Performance Share Units ("PSUs") were granted to executives of the Company. The PSUs vest on January 1, 2021. In May 2018, 316,868 PSUs were granted to employees of the Company. The PSUs vest on January 1, 2021.
During the first quarter, the Company settled 256,977 PSUs in exchange for 133,569 common shares issued from treasury, and 123,408 PSUs were settled at their cash value as payment for tax withholdings related to the settlement of the PSUs.
The Company introduced a new bonus deferral restricted share units ("RSUs") program to certain of its employees. Eligible employees have the option to receive a portion or all of their annual bonus payment in RSUs in lieu of cash. The RSUs provide for settlement in shares, and therefore these options are accounted for as equity awards. The RSUs granted are 100% vested and therefore, compensation expense associated with RSUs is recognized immediately upon issuance. During the second quarter, 128,302 RSUs were granted to employees of the Company.
During the six months ended June 30, 2018, 43,249 Deferred Share Units (“DSUs”) were issued pursuant to the election of the Directors to defer a percentage of their Directors' fee in the form of DSUs.
For the three and six months ended June 30, 2018, APUC recorded $2,061 and $3,645 (2017 - $1,686 and $3,393) in total share-based compensation expense. The compensation expense is recorded as part of administrative expenses in the unaudited interim consolidated statements of operations. The portion of share-based compensation costs capitalized as cost of construction is insignificant.
As of June 30, 2018, total unrecognized compensation costs related to non-vested options and PSUs were $2,410 and $10,090, respectively, and are expected to be recognized over a period of 1.79 and 2.01 years, respectively.

Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

11.Accumulated other comprehensive loss
AOCI consists of the following balances, net of tax:
    
 
Foreign currency cumulative translation
 
Unrealized gain on cash flow hedges
 
Net change on available-for-sale investments
 
Pension and post-employment actuarial changes
 
Total
Balance, January 1, 2017
$
(25,921
)
 
$
53,739

 
$
66

 
$
(10,833
)
 
$
17,051

OCI before reclassifications
(21,779
)
 
8,004

 
—

 
600

 
(13,175
)
Amounts reclassified
—

 
(6,378
)
 
(66
)
 
(224
)
 
(6,668
)
Net current period OCI
(21,779
)

1,626

 
(66
)
 
376

 
(19,843
)
Balance, December 31, 2017
$
(47,700
)
 
$
55,365

 
$
—

 
$
(10,457
)
 
$
(2,792
)
Cumulative catch-up adjustment related to adoption of ASU 2018-02 on tax effects in AOCI (note 2(a))
—

 
11,657

 
—

 
(1,699
)
 
9,958

OCI before reclassifications
(12,803
)
 
3,764

 
—

 
—

 
(9,039
)
Amounts reclassified
—

 
(2,961
)
 
—

 
(282
)
 
(3,243
)
Net current period OCI
$
(12,803
)
 
$
803

 
$
—

 
$
(282
)
 
$
(12,282
)
Balance, June 30, 2018
$
(60,503
)
 
$
67,825

 
$
—

 
$
(12,438
)
 
$
(5,116
)
Amounts reclassified from AOCI for unrealized gain (loss) on cash flow hedges affected revenue from non-regulated energy sales while those for pension and post-employment actuarial changes affected pension and post-employment non-service costs.
12.
Dividends
All dividends of the Company are made on a discretionary basis as determined by the Board. The Company declares and pays the dividend on its commons shares in U.S. dollars. Dividends declared during the three and six months ended June 30, 2018 and 2017 were as follows:
 
Three Months Ended June 30
 
2018
 
2017
 
Dividend
 
Dividend per share
 
Dividend
 
Dividend per share
Common shares
$
60,739

 
$
0.1282

 
$
45,034

 
$
0.1165

Series A preferred shares
$
1,046

 
C$
0.2813

 
$
1,003

 
C$
0.2813

Series D preferred shares
$
968

 
C$
0.3125

 
$
930

 
C$
0.3125

 
Six Months Ended June 30
 
2018
 
2017
 
Dividend
 
Dividend per share
 
Dividend
 
Dividend per share
Common shares
$
111,359

 
$
0.2447

 
$
90,170

 
$
0.2330

Series A preferred shares
$
2,114

 
C$
0.5626

 
$
2,024

 
C$
0.5626

Series D preferred shares
$
1,956

 
C$
0.6250

 
$
1,875

 
C$
0.6250


Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

13.
Related party transactions
Equity-method investments
The Company provides administrative services to its equity-method investees and is reimbursed for incurred costs. To that effect, the Company charged its equity-method investees $942 and $1,936 (2017 - $1,266 and $2,012) during the three and six months ended June 30, 2018.
Subject to several exceptions, Atlantica has a right of first offer on any proposed sale, transfer or other disposition by AAGES (other than to APUC) of its interest in infrastructure facilities that are developed or constructed in whole or in part by AAGES under long-term revenue agreements.  Again subject to several exceptions, Atlantica has similar rights with respect to any proposed sale, transfer or other disposition of APUC’s interest, not held through AAGES, in infrastructure facilities that are developed or constructed in whole or in part by APUC outside of Canada or the United States under long-term revenue agreements.  There were no such transactions in 2018.
Long Sault Hydro Facility
Effective December 31, 2013, APUC acquired the shares of Algonquin Power Corporation Inc. (“APC”), which was partially owned by Senior Executives.  APC owns the partnership interest in the 18MW Long Sault Hydro Facility.  A final post-closing adjustment related to the transaction remains outstanding.
The above related party transactions have been recorded at the exchange amounts agreed to by the parties to the transactions.
14.
Non-controlling interests
Net loss attributable to non-controlling interests for the three and six months ended June 30, 2018 and 2017 consists of the following:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
HLBV and other adjustments attributable to:
 
 
 
 
 
 
 
Non-controlling interest - Class A partnership units
$
(9,572
)
 
$
(11,624
)
 
$
(86,344
)
 
$
(25,060
)
Non-controlling interest - redeemable Class A partnership units
(1,681
)
 
(2,656
)
 
(5,015
)
 
(5,307
)
Other net earnings attributable to non-controlling interests
431

 
543

 
1,125

 
1,345

Net effect of non-controlling interests
$
(10,822
)
 
$
(13,737
)
 
$
(90,234
)
 
$
(29,022
)
The reduced U.S. federal corporate tax rate of 21% and other certain measures included in the Tax Act effective January 1, 2018 were reflected in the calculation of hypothetical liquidation at book value ("HLBV") in 2018. The change to the tax attributes accelerated HLBV income in the first quarter of 2018 by $55,900.
15.
Income taxes
For the six months ended June 30, 2018, the Company's overall effective tax rate was different from the statutory rate of 26.5% (2017 - 26.5%) due primarily to the immediate fair value loss on its investment in Atlantica,  which was not tax benefited (note 6(a)), and the tax impact of the accelerated HLBV income as a result of tax reform (note 14).
As a result of the Tax Act being enacted during 2017, the Company was required to revalue its United States deferred income tax assets and liabilities based on the rates they are expected to reverse at in the future, which is generally 21% for U.S. federal tax purposes. The Company was able to make reasonable estimates of the impact of the Act and recorded provisional amounts for the re-measurement of deferred taxes in the Company’s December 31, 2017 financial statements.
The Company has not yet finalized its assessment of the provisional amounts determined at December 31, 2017 and there were no significant adjustments recorded during the six months ended June 30, 2018. The Company expects to complete its assessment and record any final adjustments to the provisional amounts during the measurement period in 2018 as permitted by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.

Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

15.
Income taxes (continued)
On June 1, 2018, the state of Missouri enacted legislation that, effective for tax years beginning on or after January 1, 2020, reduces the corporate income tax rate from 6.25% to 4%, among other legislative changes. The Company reduced its regulated net deferred income tax liabilities by $17,350 and recorded an equivalent increase to net regulatory liabilities since the benefit of lower Missouri state income taxes is probable of being returned to customers by order of the applicable regulator. The impact to income tax expense for the Missouri tax rate change is not significant.
16.
Basic and diluted net earnings per share
Basic and diluted net earnings per share have been calculated on the basis of net earnings attributable to the common shareholders of the Company and the weighted average number of common shares and RSUs outstanding. Diluted net earnings per share is computed using the weighted-average number of common shares, subscription receipts outstanding, additional shares issued subsequent to quarter-end under the dividend reinvestment plan, PSUs, and DSUs outstanding during the period and, if dilutive, potential incremental common shares resulting from the application of the treasury stock method to outstanding share options. The convertible debentures are convertible into common shares at any time after the Final Instalment Date, but prior to maturity or redemption by the Company. The Final Instalment Date occurred on February 2, 2017, and as such, the shares issuable upon conversion of the convertible debentures are included in diluted net earnings per share beginning on that date.
The reconciliation of the net earnings and the weighted average shares used in the computation of basic and diluted net earnings per share for the six months ended June 30 are as follows:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
Net earnings attributable to shareholders of APUC
$
65,462

 
$
35,320

 
$
83,060

 
$
54,616

Series A Preferred shares dividend
1,046

 
1,003

 
2,114

 
2,024

Series D Preferred shares dividend
968

 
930

 
1,956

 
1,875

Net earnings attributable to common shareholders of APUC from continuing operations – Basic and Diluted
$
63,448

 
$
33,387

 
$
78,990

 
$
50,717

Weighted average number of shares
 
 
 
 
 
 
 
Basic
462,608,870

 
385,486,772

 
447,861,135

 
364,634,149

Effect of dilutive securities
4,173,646

 
3,682,452

 
3,996,021

 
3,824,012

Diluted
466,782,516

 
389,169,224

 
451,857,156

 
368,458,161

The shares potentially issuable for the three and six months ended June 30, 2018, as a result of 3,440,813 and 3,380,184 share options (2017 - 2,328,343 and 1,678,156) are excluded from this calculation as they are anti-dilutive.

Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

17.Segmented information
The Liberty Power Group owns and operates a diversified portfolio of non-regulated renewable and thermal electric generation utility assets in North America and internationally; the Liberty Utilities Group owns and operates a portfolio of regulated electric, natural gas, water distribution and wastewater collection utility systems and transmission operations in the United States.
For purposes of evaluating divisional performance, the Company allocates the realized portion of any gains or losses on financial instruments to specific divisions. The change in value of investment carried at fair value and unrealized portion of any gains or losses on derivative instruments not designated in a hedging relationship are not considered in management’s evaluation of divisional performance and are therefore allocated and reported in the corporate segment. The results of operations and assets for these segments are reflected in the tables below.
 
Three Months Ended June 30, 2018
 
Liberty Power Group
 
Liberty Utilities Group
 
Corporate
 
Total
Revenue (1)(2)
$
56,213

 
$
310,026

 
$
—

 
$
366,239

Fuel, power and water purchased
4,523

 
89,069

 
—

 
93,592

Net revenue
51,690

 
220,957

 
—

 
272,647

Operating expenses
18,748

 
101,514

 
—

 
120,262

Administrative expenses
4,166

 
9,212

 
185

 
13,563

Depreciation and amortization
19,790

 
44,740

 
251

 
64,781

Gain on foreign exchange
—

 
—

 
(1,272
)
 
(1,272
)
Operating income
8,986

 
65,491

 
836

 
75,313

Interest expense
13,127

 
24,767

 
535

 
38,429

Interest, dividend, equity and other income
(8,915
)
 
(1,360
)
 
(617
)
 
(10,892
)
Change in value of investment carried at fair value
—

 
—

 
(15,033
)
 
(15,033
)
Other
(157
)
 
442

 
1,058

 
1,343

Earnings before income taxes
$
4,931

 
$
41,642

 
$
14,893

 
$
61,466

Capital expenditures
10,552

 
72,544

 
—

 
83,096

(1) Revenues include $4,846 related to hedging gains for the three months ended June 30, 2018 that do not represent revenues recognized from contracts with customers.
(2) Liberty Utilities Group revenues include $5,339 related to alternative revenue programs for the three months ended June 30, 2018 that do not represent revenues recognized from contracts with customers.



















Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)


17.Segmented information (continued)
 
Three Months Ended June 30, 2017
 
Liberty Power Group
 
Liberty Utilities Group
 
Corporate
 
Total
Revenue
$
57,005

 
$
280,118

 
$
—

 
$
337,123

Fuel, power and water purchased
3,716

 
69,779

 
—

 
73,495

Net revenue
53,289

 
210,339

 
—

 
263,628

Operating expenses
17,143

 
101,432

 
—

 
118,575

Administrative expenses
4,711

 
7,955

 
(342
)
 
12,324

Depreciation and amortization
20,325

 
42,124

 
248

 
62,697

Gain on foreign exchange
—

 
—

 
(2,933
)
 
(2,933
)
Operating income
11,110

 
58,828

 
3,027

 
72,965

Interest expense
9,487

 
27,278

 
422

 
37,187

Interest, dividend, equity and other income
(514
)
 
(871
)
 
(678
)
 
(2,063
)
Other
$
534

 
$
(1,939
)
 
$
49

 
$
(1,356
)
Earnings (loss) before income taxes
1,603

 
34,360

 
3,234

 
39,197

Capital expenditures
73,418

 
69,351

 
—

 
142,769


Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

17.Segmented information (continued)

 
Six Months Ended June 30, 2018
 
Liberty Power Group
 
Liberty Utilities Group
 
Corporate
 
Total
Revenue (1)(2)
$
126,769

 
$
734,307

 
$
—

 
$
861,076

Fuel, power and water purchased
13,454

 
252,428

 
—

 
265,882

Net revenue
113,315

 
481,879

 
—

 
595,194

Operating expenses
37,396

 
203,988

 
—

 
241,384

Administrative expenses
7,745

 
18,057

 
345

 
26,147

Depreciation and amortization
43,433

 
89,484

 
513

 
133,430

Gain on foreign exchange
—

 
—

 
(1,071
)
 
(1,071
)
Operating income
24,741

 
170,350

 
213

 
195,304

Interest expense
22,867

 
49,971

 
1,091

 
73,929

Interest, dividend, equity and other income
(17,676
)
 
(2,760
)
 
(1,117
)
 
(21,553
)
Change in value of investment carried at fair value
—

 
—

 
101,971

 
101,971

Other
(40
)
 
(355
)
 
8,644

 
8,249

Earnings (loss) before income taxes
$
19,590

 
$
123,494

 
$
(110,376
)
 
$
32,708

Capital expenditures
72,537

 
168,733

 
—

 
241,270

 
June 30, 2018
Property, plant and equipment
$
2,185,137

 
$
4,089,947

 
$
32,441

 
$
6,307,525

Equity-method investees (note 6)
32,887

 
953

 
269

 
34,109

Total assets
2,979,099

 
5,834,208

 
107,367

 
8,920,674

(1) Revenues include $13,230 related to hedging gains for the six months ended June 30, 2018 that do not represent revenues recognized from contracts with customers.
(2) Liberty Utilities Group revenues include $5,970 related to alternative revenue programs for the six months ended June 30, 2018 that do not represents revenues recognized from contracts with customers.

Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

17.Segmented information (continued)
 
Six Months Ended June 30, 2017
 
Liberty Power Group
 
Liberty Utilities Group
 
Corporate
 
Total
Revenue
$
114,954

 
$
643,844

 
$
—

 
$
758,798

Fuel and power purchased
9,242

 
188,020

 
—

 
197,262

Net revenue
105,712

 
455,824

 
—

 
561,536

Operating expenses
31,649

 
196,945

 
—

 
228,594

Administrative expenses
8,014

 
15,090

 
325

 
23,429

Depreciation and amortization
40,096

 
84,597

 
501

 
125,194

Gain on foreign exchange
—

 
—

 
(2,975
)
 
(2,975
)
Operating income
25,953

 
159,192

 
2,149

 
187,294

Interest expense
17,844

 
47,962

 
20,233

 
86,039

Interest, dividend and other income
(1,435
)
 
(1,867
)
 
(1,239
)
 
(4,541
)
Other
1,728

 
649

 
45,854

 
48,231

Earnings (loss) before income taxes
$
7,816

 
$
112,448

 
$
(62,699
)
 
$
57,565

Capital expenditures
87,153

 
211,504

 
—

 
298,657

 
December 31, 2017
Property, plant and equipment
$
2,246,869

 
$
4,023,479

 
$
34,549

 
$
6,304,897

Equity-method investees
29,710

 
2,220

 
337

 
32,267

Total assets
2,474,293

 
5,819,440

 
103,675

 
8,397,408


APUC operates in the independent power and utility industries in both Canada and the United States. Information on operations by geographic area is as follows:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
Revenue
 
 
 
 
 
 
 
Canada
$
17,616

 
$
17,418

 
$
36,902

 
$
36,733

United States
348,623

 
319,705

 
824,174

 
722,065

 
$
366,239

 
$
337,123

 
$
861,076

 
$
758,798

18.Commitments and contingencies
(a)
Contingencies
APUC and its subsidiaries are involved in various claims and litigation arising out of the ordinary course and conduct of its business. Although such matters cannot be predicted with certainty, management does not consider APUC’s exposure to such litigation to be material to these financial statements. Accruals for any contingencies related to these items are recorded in the consolidated financial statements at the time it is concluded that its occurrence is probable and the related liability is estimable.
Condemnation Expropriation Proceedings
Liberty Utilities (Apple Valley Ranchos Water) Corp. is the subject of a condemnation lawsuit filed by the town of Apple Valley. A Court will determine the necessity of the taking by Apple Valley and, if established, a jury will determine the fair market value of the assets being condemned.  Resolution of the condemnation proceedings is expected to take two to three years. Any taking by government entities would legally require fair compensation to be paid; however, there is no assurance that the value received as a result of the condemnation will be sufficient to recover the Company's net book value of the utility assets taken.

Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

18.Commitments and contingencies (continued)
(b)
Commitments
In addition to the commitments related to the proposed acquisitions and development projects disclosed in notes 3 and 6, the following significant commitments exist as of June 30, 2018.
APUC has outstanding purchase commitments for power purchases, gas delivery, service and supply, service agreements, capital project commitments and operating leases.
Detailed below are estimates of future commitments under these arrangements: 

Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter
Total
Power purchase (i)
$
59,258

$
10,789

$
11,004

$
11,225

$
11,452

$
197,029

$
300,757

Gas supply and service agreements (ii)
69,760

50,956

31,989

21,171

16,327

38,768

228,971

Service agreements
36,589

39,845

39,920

37,739

38,173

326,294

518,560

Capital projects
42,865

783

587

—

—

—

44,235

Operating leases
7,907

7,171

6,944

6,957

6,791

182,277

218,047

Total
$
216,379

$
109,544

$
90,444

$
77,092

$
72,743

$
744,368

$
1,310,570

(i)
Power purchase: APUC’s electric distribution facilities have commitments to purchase physical quantities of power for load serving requirements. The commitment amounts included in the table above are based on market prices as of June 30, 2018. However, the effects of purchased power unit cost adjustments are mitigated through a purchased power rate-adjustment mechanism.
(ii)
Gas supply and service agreements: APUC’s gas distribution facilities and thermal generation facilities have commitments to purchase physical quantities of natural gas under contracts for purposes of load serving requirements and of generating power.
19.
Non-cash operating items
The changes in non-cash operating items consist of the following:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
Accounts receivable
$
45,821

 
$
33,124

 
$
29,784

 
$
40,795

Fuel and natural gas in storage
(6,885
)
 
(6,873
)
 
9,335

 
1,358

Supplies and consumable inventory
(3,397
)
 
40

 
(5,344
)
 
(1,062
)
Income taxes recoverable
(2,066
)
 
(928
)
 
(2,074
)
 
(1,910
)
Prepaid expenses
7,287

 
(4,950
)
 
4,034

 
(6,065
)
Accounts payable
(10,457
)
 
2,171

 
(50,512
)
 
(60,398
)
Accrued liabilities
(13,833
)
 
(47,424
)
 
(29,316
)
 
(32,913
)
Current income tax liability
2,099

 
(180
)
 
2,789

 
514

Net regulatory assets and liabilities
4,408

 
(9,065
)
 
1,313

 
(15,781
)
 
$
22,977

 
$
(34,085
)
 
$
(39,991
)
 
$
(75,462
)

Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

20.
Financial instruments
(a)
Fair value of financial instruments
June 30, 2018
Carrying
amount
 
Fair
value
 
Level 1
 
Level 2
 
Level 3
Notes receivable
$
99,220

 
$
109,360

 
$
—

 
$
109,360

 
$
—

Investment in Atlantica
505,596

 
505,596

 
505,596

 
—

 
—

Derivative instruments (1):
 
 
 
 
 
 
 
 
 
Energy contracts designated as a cash flow hedge
64,517

 
64,517

 
—

 
—

 
64,517

Currency forward contract not designated as a hedge
713

 
713

 
—

 
713

 
—

Commodity contracts for regulated operations
97

 
97

 
—

 
97

 
—

Total derivative instruments
65,327

 
65,327

 
—

 
810

 
64,517

Total financial assets
$
670,143

 
$
680,283

 
$
505,596

 
$
110,170

 
$
64,517

Long-term debt
$
3,447,489

 
$
3,491,332

 
$
611,319

 
$
2,880,013

 
$
—

Convertible debentures
632

 
794

 
794

 
—

 
—

Preferred shares, Series C
13,984

 
14,819

 
—

 
14,819

 
—

Derivative instruments:
 
 
 
 
 
 
 
 
 
Energy contracts designated as a cash flow hedge
26

 
26

 
—

 
—

 
26

Energy contracts not designated as a cash flow hedge
104

 
104

 
—

 
104

 
—

Cross-currency swap designated as a net investment hedge
72,486

 
72,486

 
—

 
72,486

 
—

Interest rate swap designated as a hedge
7,112

 
7,112

 
—

 
7,112

 
—

Commodity contracts for regulated operations
1,926

 
1,926

 
—

 
1,926

 
—

Total derivative instruments
81,654

 
81,654

 
—

 
81,628

 
26

Total financial liabilities
$
3,543,759

 
$
3,588,599

 
$
612,113

 
$
2,976,460

 
$
26

(1) Balance of $191 associated with certain weather derivatives has been excluded, as they are accounted for based on intrinsic value rather than fair value.

Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

20.
Financial instruments (continued)
(a)Fair value of financial instruments (continued)
December 31, 2017
Carrying
amount
 
Fair
value
 
Level 1
 
Level 2
 
Level 3
Notes receivable
$
33,378

 
$
38,192

 
$
—

 
$
38,192

 
$
—

Derivative instruments (1):
 
 
 
 
 
 
 
 
 
Energy contracts designated as a cash flow hedge
63,363

 
63,363

 
—

 
—

 
63,363

Energy contracts not designated as a cash flow hedge
109

 
109

 
—

 
109

 
—

Commodity contracts for regulatory operations
74

 
74

 
—

 
74

 
—

Total derivative instruments
63,546

 
63,546

 
—

 
183

 
63,363

Total financial assets
$
96,924

 
$
101,738

 
$
—

 
$
38,375

 
$
63,363

Long-term debt
$
3,079,551

 
$
3,262,711

 
$
651,969

 
$
2,610,742

 
$
—

Convertible debentures
971

 
1,018

 
1,018

 
—

 
—

Preferred shares, Series C
14,718

 
15,124

 
—

 
15,124

 
—

Derivative instruments:
 
 
 
 
 
 
 
 
 
Energy contracts designated as a cash flow hedge
77

 
77

 
—

 
—

 
77

Energy contracts not designated as a cash flow hedge
31

 
31

 
—

 
31

 
—

Cross-currency swap designated as a net investment hedge
57,412

 
57,412

 
—

 
57,412

 
—

Interest rate swaps designated as a hedge
8,460

 
8,460

 
—

 
8,460

 
—

Currency forward contract not designated as a hedge
344

 
344

 
—

 
344

 
—

Commodity contracts for regulated operations
2,620

 
2,620

 
—

 
2,620

 
—

Total derivative instruments
68,944

 
68,944

 
—

 
68,867

 
77

Total financial liabilities
$
3,164,184

 
$
3,347,797

 
$
652,987

 
$
2,694,733

 
$
77

(1) Balance of $441 associated with certain weather derivatives has been excluded, as they are accounted for based on intrinsic value rather than fair value.






Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

20.
Financial instruments (continued)
(a)
Fair value of financial instruments (continued)
The Company has determined that the carrying value of its short-term financial assets and liabilities approximates fair value as of June 30, 2018 and 2017 due to the short-term maturity of these instruments.
Notes receivable fair values (Level 2) have been determined using a discounted cash flow method, using estimated current market rates for similar instruments adjusted for estimated credit risk as determined by management.
The fair value of the investment in Atlantica (Level 1) is measured at the closing price on the NYSE stock exchanges.
The Company’s Level 2 fair value of long-term debt at fixed interest rates and Series C preferred shares has been determined using a discounted cash flow method and current interest rates.
The Company’s Level 2 fair value derivative instruments primarily consist of swaps, options, rights and forward physical deals where market data for pricing inputs are observable. Level 2 pricing inputs are obtained from various market indices and utilize discounting based on quoted interest rate curves which are observable in the marketplace.
The Company’s Level 3 instruments consist of energy contracts for electricity sales. The significant unobservable inputs used in the fair value measurement of energy contracts are the internally developed forward market prices ranging from $15.83 to $131.48 with a weighted average of $24.78 as of June 30, 2018.  The processes and methods of measurement are developed using the market knowledge of the trading operations within the Company and are derived from observable energy curves adjusted to reflect the illiquid market of the hedges and, in some cases, the variability in deliverable energy.  Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement. The change in the fair value of the energy contracts is detailed in notes 20(b)(ii) and 20(b)(iv).
Fair value estimates are made at a specific point in time, using available information about the financial instrument. These estimates are subjective in nature and often cannot be determined with precision.
The Company’s accounting policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There was no transfer into or out of Level 1, Level 2 or Level 3 during the three or six months ended June 30, 2018 and 2017.
(b)
Derivative instruments
Derivative instruments are recognized on the unaudited interim consolidated balance sheets as either assets or liabilities and measured at fair value at each reporting period.
(i)
Commodity derivatives – regulated accounting
The Company uses derivative financial instruments to reduce the cash flow variability associated with the purchase price for a portion of future natural gas purchases associated with its regulated gas and electric service territories. The Company’s strategy is to minimize fluctuations in gas sale prices to regulated customers.
The following are commodity volumes, in dekatherms (“dths”) associated with the above derivative contracts:
 
2018
Financial contracts: Swaps
2,662,465

Forward contracts
9,440,000

 
12,102,465



Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

20.
Financial instruments (continued)
(b)
Derivative instruments (continued)
(i)
Commodity derivatives – regulated accounting (continued)
The accounting for these derivative instruments is subject to guidance for rate-regulated enterprises. Therefore, the fair value of these derivatives is recorded as current or long-term assets and liabilities, with offsetting positions recorded as regulatory assets and regulatory liabilities in the unaudited interim consolidated balance sheets. The gains or losses on settlement of these contracts are included in the calculation of deferred gas costs (note 5). As a result, the changes in fair value of these natural gas derivative contracts and their offsetting adjustment to regulatory assets and liabilities had no earnings impact.
The following table presents the impact of the change in the fair value of the Company’s natural gas derivative contracts had on the unaudited interim consolidated balance sheets: 
 
 
June 30, 2018
 
 
December 31, 2017
Regulatory assets:
 
 
 
 
 
Swap contracts
 
$
13

 
 
$
—

Forward contracts
 
$
80

 
 
$
6,319

Regulatory liabilities:
 
 
 
 
 
Swap contracts
 
$
151

 
 
$
287

Option contracts
 
$
—

 
 
$
138

Forward contracts
 
$
374

 
 
$
—

(ii)
Cash flow hedges
The Company reduces the price risk on the expected future sale of power generation at Sandy Ridge, Senate and Minonk Wind Facilities by entering into the following long-term energy derivative contracts. 
Notional quantity
(MW-hrs)
 
Expiry
 
Receive average
prices (per MW-hr)
 
Pay floating price
(per MW-hr)
623,528

 
 December 2023
 
$
 
40.15

 
PJM Western HUB
2,655,520

 
 December 2023
 
$
 
29.15

 
NI HUB
3,136,446

 
 December 2027
 
$
 
36.46

 
ERCORT North HUB
The Company is party to a 10-year forward-starting interest rate swap beginning on July 25, 2018 in order to reduce the interest rate risk related to the probable issuance on that date of a 10-year $135,000 bond. The change in fair value resulted in a gain of $301 and $981 for the three and six months ended June 30, 2018 (2017 - gain of $1,009 and $194), which is recorded in OCI. Subsequent to quarter end, the Company amended and extended the forward-starting date of the interest rate swap to begin on March 29, 2019.







Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

20.
Financial instruments (continued)
(b)
Derivative instruments (continued)
(ii)
Cash flow hedges (continued)
The following table summarizes OCI attributable to derivative financial instruments designated as a cash flow hedge: 
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Effective portion of cash flow hedge
$
6,204

 
$
(1,198
)
 
$
3,764

 
$
4,806

Amortization of cash flow hedge
(8
)
 
(10
)
 
(16
)
 
(14
)
Amount reclassified from AOCI
(1,642
)
 
(1,520
)
 
(2,945
)
 
(3,541
)
OCI attributable to shareholders of APUC
$
4,554

 
$
(2,728
)
 
$
803

 
$
1,251

The Company expects $8,761 and $2,107 of unrealized gains currently in AOCI to be reclassified, net of taxes, into non-regulated energy sales and interest expense, respectively, within the next twelve months, as the underlying hedged transactions settle.
(iii)
Foreign exchange hedge of net investment in foreign operation
The Company is exposed to currency fluctuations from its Canadian based operations. APUC manages this risk primarily through the use of natural hedges by using Canadian long-term debt to finance its Canadian operations and a combination of foreign exchange forward contracts and spot purchases. APUC only enters into foreign exchange forward contracts with major North American financial institutions having a credit rating of A or better, thus reducing credit risk on these forward contracts.
The Company’s Canadian operations are determined to have the Canadian dollar as their functional currency and are exposed to currency fluctuations from their U.S. dollar transactions. The Company designates the amounts drawn on the Liberty Power Group’s revolving credit facility denominated in U.S. dollars in excess of the principal amount on the USD loans receivable from its equity investees as a hedge of the foreign currency exposure of its net investment in the Liberty Power Group’s U.S. operations. The related foreign currency transaction gain or loss designated as, and effective as, a hedge of the net investment in a foreign operation is reported in the same manner as the translation adjustment (in OCI) related to the net investment. A foreign currency gain of $nil and $nil for the three and six months ended June 30, 2018 (2017 - $3,482 and $3,482) was recorded in OCI.
Concurrent with its $150,000, $200,000 and $300,000 debenture offerings in December 2012, January 2014, and January 2017, respectively, the Company entered into cross currency swaps, coterminous with the debentures, to effectively convert the Canadian dollar denominated offering into U.S. dollars. The Company designated the entire notional amount of the cross currency fixed-for-fixed interest rate swap and related short-term U.S. dollar payables created by the monthly accruals of the swap settlement as a hedge of the foreign currency exposure of its net investment in the Liberty Power Group’s U.S. operations. The gain or loss related to the fair value changes of the swap and the related foreign currency gains and losses on the U.S. dollar accruals that are designated as, and are effective as, a hedge of the net investment in a foreign operation are reported in the same manner as the translation adjustment (in OCI) related to the net investment. For the three and six months ended June 30, 2018, a loss of $11,477 and $17,940 (2017 - gain of $4,862 and loss of $240) was recorded in OCI.

Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

20.
Financial instruments (continued)
(b)
Derivative instruments (continued)
(iv)
Other derivatives
The Company provides energy requirements to various customers under contracts at fixed rates. While the production from the Tinker Hydroelectric Facility is expected to provide a portion of the energy required to service these customers, APUC anticipates having to purchase a portion of its energy requirements at the ISO NE spot rates to supplement self-generated energy.
This risk is mitigated though the use of short-term financial forward energy purchase contracts that are classified as derivative instruments. The electricity derivative contracts are net settled fixed-for-floating swaps whereby APUC pays a fixed price and receives the floating or indexed price on a notional quantity of energy over the remainder of the contract term at an average rate, as per the following table. These contracts are not accounted for as hedges and changes in fair value are recorded in earnings as they occur.
The Company is exposed to interest rate fluctuations related to certain of its floating rate debt obligation, including certain project specific debt and its revolving credit facilities, its interest rate swaps as well as interest earned on its cash on hand. The Company currently hedges some of that risk (note 20(b)(ii)).
The Company is exposed to foreign exchange fluctuations related to the portion of its dividend declared and payable in U.S. dollars. This risk is mitigated through the use of currency forward contracts. For the three and six months ended June 30, 2018, a gain on foreign exchange of $276 and $204 (2017 - loss of $764 and $669) was recorded in the unaudited interim consolidated statements of operations. These currency forward contracts are not accounted for as a hedge.
For derivatives that are not designated as hedges and for the ineffective portion of gains and losses on derivatives that are accounted for as hedges, the changes in the fair value are immediately recognized in earnings.






















Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
June 30, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

20.
Financial instruments (continued)
(b)
Derivative instruments (continued)
(iv)
Other derivatives (continued)
The effects on the unaudited interim consolidated statements of operations of derivative financial instruments not designated as hedges consist of the following:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
Change in unrealized loss (gain) on derivative financial instruments:
 
 
 
 
 
 
 
Energy derivative contracts
$
67

 
$
—

 
$
182

 
$
—

Currency forward contract
(728
)
 
746

 
(1,063
)
 
832

Total change in unrealized loss (gain) on derivative financial instruments
$
(661
)
 
$
746

 
$
(881
)
 
$
832

Realized loss (gain) on derivative financial instruments:
 
 
 
 
 
 
 
Interest rate swaps
—

 
—

 
—

 
(144
)
Energy derivative contracts
—

 
—

 
13

 
553

Currency forward contract
452

 
—

 
859

 
12,261

Total realized loss on derivative financial instruments
$
452

 
$
—

 
$
872

 
$
12,670

Loss (gain) on derivative financial instruments not accounted for as hedges
(209
)
 
746

 
(9
)
 
13,502

Ineffective portion of derivative financial instruments accounted for as hedges
(12
)
 
(12
)
 
(23
)
 
622

 
$
(221
)
 
$
734

 
$
(32
)
 
$
14,124

Amounts recognized in the consolidated statements of operations consist of:
 
 
 
 
 
 
 
Loss (gain) on derivative financial instruments
55

 
(12
)
 
172

 
1,212

Loss (gain) on foreign exchange
(276
)
 
746

 
(204
)
 
12,912

 
$
(221
)
 
$
734

 
$
(32
)
 
$
14,124

(c)
Risk management
In the normal course of business, the Company is exposed to financial risks that potentially impact its operating results. The Company employs risk management strategies with a view of mitigating these risks to the extent possible on a cost effective basis. Derivative financial instruments are used to manage certain exposures to fluctuations in exchange rates, interest rates and commodity prices. The Company does not enter into derivative financial agreements for speculative purposes.
21.
Comparative figures
Certain of the comparative figures have been reclassified to conform to the financial statement presentation adopted in the current period.