Form 6-K Algonquin Power & Utilities Corp.

6-K - Report of foreign issuer [Rules 13a-16 and 15d-16]

Published: 2018-05-10 17:28:49
Submitted: 2018-05-10
Period Ending In: 2018-03-31
a2018q1-6xkcoverfullfinanc.htm 6-K COVER Q1 2018 FILINGS



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 6-K
_______________________
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
Date: May 10, 2018
Commission File Number:
001-37946
_______________________
 
 
Algonquin Power & Utilities Corp.
(Translation of registrant’s name into English)
_______________________
354 Davis Road
Oakville, Ontario, L6J 2X1, Canada
(Address of principal executive offices)
_______________________
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F
    
Form 40-F
x
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Indicate by check mark whether by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes
    
No
x
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-
     


EXHIBIT INDEX
The following exhibits are filed as part of this Form 6-K:
Exhibit
Description
99.1
Unaudited Financial Statements for the quarter ended March 31, 2018.
99.2
Management’s Discussion & Analysis for quarter ended March 31, 2018.
99.3
Certifications of Chief Executive Officer.
99.4
Certifications of Chief Financial Officer.
99.5
Earnings Call Press Release for the quarter ended March 31, 2018
99.6
Common Share Dividend Press Release.
99.7
Prefrerred Share Dividend Press Release.


SIGNATURE
  
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
ALGONQUIN POWER & UTILITIES CORP.
 
(registrant)
 
 
 
 
Date:
 May 10, 2018
By:  
(signed) "David Bronicheski"
 
Name: David Bronicheski
 
Title:   Chief Financial Officer



a2018q1-exhibit991xfinanci.htm EXHIBIT 99.1 Q1 2018 UNAUDITED FINANCIAL STATEMENTS


Unaudited Interim Consolidated Financial Statements of
Algonquin Power & Utilities Corp.
For the
three months ended March 31, 2018
and
2017




Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Balance Sheets

(thousands of U.S. dollars)
 
 
 
 
March 31, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
67,914

 
$
43,484

Accounts receivable, net (note 4)
245,382

 
244,617

Fuel and natural gas in storage
28,195

 
44,414

Supplies and consumables inventory
47,090

 
45,074

Regulatory assets (note 5)
73,953

 
66,567

Prepaid expenses
33,966

 
31,005

Derivative instruments (note 20)
11,481

 
16,099

Other assets
5,347

 
7,110

 
513,328

 
498,370

Property, plant and equipment, net
6,304,991

 
6,304,897

Intangible assets, net
50,123

 
51,103

Goodwill
954,282

 
954,282

Regulatory assets (note 5)
372,953

 
376,800

Derivative instruments (note 20)
49,839

 
54,115

Long-term investment carried at fair value (note 6)
490,563

 

Long-term investments (note 6)
110,904

 
67,331

Deferred income taxes (note 15)
64,114

 
61,357

Restricted cash
16,248

 
15,939

Other assets
14,420

 
13,214

 
$
8,941,765

 
$
8,397,408





Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Balance Sheets

(thousands of U.S. dollars)
 
 
 
 
March 31, 2018
 
December 31, 2017
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
62,791

 
$
119,887

Accrued liabilities
184,440

 
280,144

Dividends payable (note 12)
50,377

 
50,445

Regulatory liabilities (note 5)
38,791

 
37,687

Long-term debt (note 7)
13,327

 
12,364

Other long-term liabilities and deferred credits (note 9)
41,918

 
45,903

Derivative instruments (note 20)
13,103

 
14,126

Other liabilities
4,633

 
3,474

 
409,380

 
564,030

Long-term debt (note 7)
3,818,560

 
3,067,187

Convertible debentures
788

 
971

Regulatory liabilities (note 5)
548,291

 
540,278

Deferred income taxes (note 15)
431,157

 
399,148

Derivative instruments (note 20)
59,950

 
54,818

Pension and other post-employment benefits obligation (note 8)
169,356

 
168,189

Other long-term liabilities (note 9)
228,282

 
227,267

Preferred shares, Series C
13,450

 
13,867

 
5,269,834

 
4,471,725

Redeemable non-controlling interest
37,912

 
41,553

Equity:
 
 
 
Preferred shares
184,299

 
184,299

Common shares (note 10(a))
3,036,129

 
3,021,699

Additional paid-in capital
37,636

 
38,569

Deficit
(569,466
)
 
(524,311
)
Accumulated other comprehensive income (loss) (note 11)
890

 
(2,792
)
Total equity attributable to shareholders of Algonquin Power & Utilities Corp.
2,689,488

 
2,717,464

Non-controlling interests
535,151

 
602,636

Total equity
3,224,639

 
3,320,100

Commitments and contingencies (note 18)

 

Subsequent events (notes 6(a) and 10(a))

 

 
$
8,941,765

 
$
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 March 31
 
2018
 
2017
Revenue
 
 
 
Regulated electricity distribution
$
212,705

 
$
181,451

Regulated gas distribution
182,631

 
148,240

Regulated water reclamation and distribution
27,592

 
32,446

Non-regulated energy sales
67,841

 
54,204

Other revenue
4,068

 
5,334

 
494,837

 
421,675

Expenses
 
 
 
Operating expenses
121,122

 
110,019

Regulated electricity purchased
70,906

 
54,647

Regulated gas purchased
90,405

 
61,584

Regulated water purchased
2,048

 
2,010

Non-regulated energy purchased
8,931

 
5,526

Administrative expenses
12,584

 
11,105

Depreciation and amortization
68,649

 
62,497

Loss (gain) on foreign exchange
201

 
(42
)
 
374,846

 
307,346

Operating income
119,991

 
114,329

Interest expense on long-term debt and others
35,500

 
35,470

Interest expense on convertible debentures and amortization of acquisition financing

 
13,383

Change in value of investment carried at fair value (note 6(a))
117,004

 

Interest, dividend, equity and other income (note 6)
(10,661
)
 
(2,478
)
Pension and post-employment non-service costs (note 8)
431

 
2,540

Other losses (gains)
(1,228
)
 
16

Acquisition-related costs
7,586

 
45,805

Loss on derivative financial instruments (note 20(b)(iv))
117

 
1,224

 
148,749

 
95,960

Earnings (loss) before income taxes
(28,758
)
 
18,369

Income tax expense (note 15)
 
 
 
Current
2,886

 
1,950

Deferred
30,170

 
12,407

 
33,056

 
14,357

Net earnings (loss)
(61,814
)
 
4,012

Net effect of non-controlling interests (note 14)
79,412

 
15,285

Net earnings attributable to shareholders of Algonquin Power & Utilities Corp.
$
17,598

 
$
19,297

Series A and D Preferred shares dividend (note 12)
2,056

 
1,966

Net earnings attributable to common shareholders of Algonquin Power & Utilities Corp.
$
15,542

 
$
17,331

Basic net earnings per share (note 16)
$
0.04

 
$
0.05

Diluted net earnings per share (note 16)
$
0.04

 
$
0.05

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 March 31
 
2018
 
2017
Net earnings (loss)
$
(61,814
)
 
$
4,012

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment, net of tax expense of $300 and $nil, respectively (notes 20(b)(iii) and 20(b)(iv))
(2,446
)
 
(28,660
)
Change in fair value of cash flow hedges, net of tax recovery of $1,395 and tax expense of $2,692, respectively (note 20(b)(ii))
(3,751
)
 
3,979

Change in pension and other post-employment benefits, net of tax recovery of $37 and tax expense of $28, respectively (note 8)
(102
)
 
49

Other comprehensive loss, net of tax
(6,299
)
 
(24,632
)
Comprehensive loss
(68,113
)
 
(20,620
)
Comprehensive loss attributable to the non-controlling interests
(79,435
)
 
(15,285
)
Comprehensive income (loss) attributable to shareholders of Algonquin Power & Utilities Corp.
$
11,322

 
$
(5,335
)
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 three months ended March 31, 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)

 

 

 
17,598

 

 
(79,412
)
 
(61,814
)
Redeemable non-controlling interests not included in equity

 

 

 

 

 
3,334

 
3,334

Other comprehensive loss

 

 

 

 
(6,276
)
 
(23
)
 
(6,299
)
Dividends declared and distributions to non-controlling interests

 

 

 
(41,828
)
 

 
(2,647
)
 
(44,475
)
Dividends and issuance of shares under dividend reinvestment plan
10,848

 

 

 
(10,848
)
 

 

 

Common shares issued pursuant to public offering, net of costs (note 10(a))
(172
)
 

 

 

 

 

 
(172
)
Common shares issued upon conversion of convertible debentures
159

 

 

 

 

 

 
159

Common shares issued pursuant to share-based awards (note 10(b))
3,595

 

 
(2,671
)
 
(1,979
)
 

 

 
(1,055
)
Share-based compensation (note 10(b))

 

 
1,738

 

 

 

 
1,738

Contributions received from non-controlling interests

 

 

 

 

 
11,263

 
11,263

Balance, March 31, 2018
$
3,036,129

 
$
184,299

 
$
37,636

 
$
(569,466
)
 
$
890

 
$
535,151

 
$
3,224,639

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 March 31
 
2018
 
2017
Cash provided by (used in):
 
 
 
Operating Activities
 
 
 
Net earnings (loss) from continuing operations
$
(61,814
)
 
$
4,012

Adjustments and items not affecting cash:
 
 
 
Depreciation and amortization
69,340

 
68,084

Deferred taxes
30,170

 
12,407

Unrealized loss on derivative financial instruments
2,876

 
1,782

Share-based compensation expense
1,578

 
1,781

Cost of equity funds used for construction purposes
(653
)
 
(415
)
Change in value of investment carried at fair value
117,004

 

Pension and post-employment contributions in excess of expense
3,143

 
10,535

Distributions received from equity investments, net of income
(447
)
 
(1,107
)
Other
(1,217
)
 
(206
)
Changes in non-cash operating items (note 19)
(62,968
)
 
(41,377
)
 
97,012

 
55,496

Financing Activities
 
 
 
Increase in long-term debt
834,418

 
962,314

Decrease in long-term debt
(62,805
)
 
(1,447,751
)
Issuance of convertible debentures, net of costs

 
571,662

Cash dividends on common shares
(39,480
)
 
(22,842
)
Dividends on preferred shares
(2,056
)
 
(1,966
)
Contributions from non-controlling interests

 
40,724

Production-based cash contributions from non-controlling interest
11,263

 
6,816

Distributions to non-controlling interests
(2,506
)
 
(154
)
Issuance of common shares, net of costs
329

 
36

Proceeds from exercise of share options

 
9,563

Shares surrendered to fund withholding taxes on exercised share options
(327
)
 

Increase in other long-term liabilities
2,103

 
7,260

Decrease in other long-term liabilities
(3,175
)
 
(2,702
)
 
737,764

 
122,960

Investing Activities
 
 
 
Acquisitions of operating entities

 
(1,519,923
)
Additions to property, plant and equipment
(158,174
)
 
(155,888
)
Decrease (increase) in other assets
573

 
(557
)
Increase in long-term investments
(655,187
)
 
(15,038
)
Proceeds from sale of long-lived assets
3,028

 

 
(809,760
)
 
(1,691,406
)
Effect of exchange rate differences on cash and restricted cash
(277
)
 
(100
)
Increase (decrease) in cash, cash equivalents and restricted cash
24,739

 
(1,513,050
)
Cash, cash equivalents and restricted cash, beginning of period
59,423

 
1,591,271

Cash, cash equivalents and restricted cash, end of period
$
84,162

 
$
78,221

 
 
 
 
Supplemental disclosure of cash flow information:
2018
 
2017
Cash paid during the period for interest expense
$
33,599

 
$
48,247

Cash paid during the period for income taxes
$
1,224

 
$
1,334

Non-cash financing and investing activities:
 
 
 
Property, plant and equipment acquisitions in accruals
$
32,401

 
$
79,886

Issuance of common shares under dividend reinvestment plan and share-based compensation plans
$
13,987

 
$
19,114

Issuance of common shares upon conversion of convertible debentures
$
167

 
$
843,169

See accompanying notes to unaudited interim consolidated financial statements


Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
March 31, 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 U.S. dollars. The comparative 2017 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
March 31, 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
March 31, 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 2018-03,
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.
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.


Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
March 31, 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 2017-07,
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.
The FASB issued a revenue recognition standard codified as ASC 606,
Revenue from Contracts with Customers
. This issued accounting standard provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers unless the contracts are in the scope of other U.S. GAAP requirements, such as the leasing literature. The core principal of the accounting guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this new revenue standard in the first quarter of 2018 using the modified retrospective approach. The adoption of Topic 606 resulted in an adjustment of $2,488 or $1,860 net of taxes, increasing opening retained earnings of the unaudited interim consolidated financial statements for previously deferred revenue related to the Empire fiber business. The Company has modified its revenue recognition disclosures to align with the requirements of the new standard.



Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
March 31, 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 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 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 held training sessions with the finance team and is currently in the process of creating an inventory of its lease contracts and analyzing the terms and conditions 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 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 late 2018 or 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 expects to file the advice letter to acquire the water utility with the California Public Utility Commission in Q2 2018 with approval expected in late 2018.
4.
Accounts receivable
Accounts receivable as of
March 31, 2018
include unbilled revenue of
$57,819
(
December 31, 2017
-
$78,289
) from the Company’s regulated utilities. Accounts receivable as of
March 31, 2018
are presented net of allowance for doubtful accounts of
$6,415
(
December 31, 2017
-
$5,555
).


Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
March 31, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

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
GRC
$10,711
May 1, 2018
 with a onetime recoupment of $1,326 for the difference between the final rates and temporary rates granted on July 1, 2017
Various
 
 
$1,416
2018

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 Q1 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
March 31, 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: 
 
March 31, 2018
 
December 31, 2017
Regulatory assets
 
 
 
Environmental remediation
$
80,543

 
$
82,711

Pension and post-employment benefits
107,312

 
105,712

Debt premium
55,234

 
57,406

Fuel and commodity costs adjustment
40,583

 
34,525

Rate adjustment mechanism
30,701

 
35,491

Clean Energy and other customer programs
20,755

 
20,582

Deferred construction costs
14,275

 
14,344

Asset retirement
17,345

 
16,080

Income taxes
35,771

 
36,546

Rate case costs
9,214

 
9,295

Other
35,173

 
30,675

Total regulatory assets
$
446,906

 
$
443,367

Less: current regulatory assets
(73,953
)
 
(66,567
)
Non-current regulatory assets
$
372,953

 
$
376,800

 
 
 
 
Regulatory liabilities
 
 
 
Income taxes
$
321,657

 
$
321,138

Cost of removal
185,694

 
184,188

Rate-base offset
12,636

 
13,214

Fuel and commodity costs adjustment
22,898

 
23,543

Deferred compensation received in relation to lost production
8,754

 
9,398

Deferred construction costs - fuel related
7,389

 
7,418

Pension and post-employment benefits
14,030

 
10,082

Other
14,024

 
8,984

Total regulatory liabilities
$
587,082

 
$
577,965

Less: current regulatory liabilities
(38,791
)
 
(37,687
)
Non-current regulatory liabilities
$
548,291

 
$
540,278



Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
March 31, 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:
 
March 31, 2018
 
December 31, 2017
Long-term investment carried at fair value
 
 
 
Atlantica (a)
$
490,563

 
$

Equity-method investees
 
 
 
Red Lily I Wind Facility
18,278

 
18,174

AAGES (a)
4,787

 

Amherst Island Wind Project (b)
8,325

 
8,921

Other
3,777

 
5,172

 
35,167

 
32,267

Notes receivable
 
 
 
Development loans (c)
71,244

 
30,060

Other
2,852

 
3,318

 
74,096

 
33,378

Other investments
1,641

 
1,686

Total long-term investments
601,467

 
67,331

Amounts recognized on the unaudited interim consolidated balance sheets consist of:
 
 
 
Long-term investment carried at fair value
$
490,563

 
$

Long-term investments
110,904

 
67,331

Total long-term investments
$
601,467

 
$
67,331

(a)
Investment in joint venture with Abengoa and investment in Atlantica
On March 9, 2018, APUC and Abengoa, S.A ("Abengoa") created Abengoa-Algonquin Global Energy Solutions B.V. ("AAGES") to identify, develop, and construct clean energy and water infrastructure assets with a global focus. On formation, the two shareholders each contributed $5,000 to the capital of AAGES. The two shareholders have joint control and all decisions must be unanimous. As such, the Company is accounting for its investment in the joint venture 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 transfered 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 share based on the NYSE share price resulted in an immediate fair value loss of $117,254 while a gain of $250 was recorded for the period from acquisition to March 31, 2018. The Company also recorded dividend income of $7,767 from the Atlantica shares during the period from acquisition to March 31, 2018.
Subsequent to quarter end, APUC exercised its option 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 second or 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
March 31, 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.
Windlectric is considered a variable interest entity ("VIE") namely due to the low level of equity at risk at this point. 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 months ended
March 31
, 2018 to the investment while the Amherst Island Wind Project is under construction amounted to $222 (
2017
- $176). As at March 31, 2018, the third-party construction debt of the joint venture was C$186,281 (December 31, 2017 - C$133,765).
(c)
Development loans
As at
March 31, 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
 
March 31, 2018
 
December 31, 2017
Senior Unsecured Revolving Credit Facilities (a)
 

 
2018-2023
 
N/A

 
$
222,737

 
$
51,827

Senior Unsecured Bank Credit Facilities (b)
 

 
2018-2019
 
N/A

 
735,000

 
134,988

Commercial Paper
 

 
2023
 
N/A

 
6,500

 
5,576

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

 
1,218,014

 
1,217,797

Senior Unsecured Utility Notes
 
5.98
%
 
2020-2035
 
$
227,000

 
246,185

 
246,560

Senior Secured Utility Bonds
 
4.95
%
 
2018-2044
 
$
752,500

 
771,348

 
772,871

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

 
606,535

 
623,223

Senior Secured Project Notes
 
10.27
%
 
2020-2027
 
C$
33,026

 
25,568

 
26,709

 
 
 
 
 
 
 
 
$
3,831,887

 
$
3,079,551

Less: current portion
 
 
 
 
 
 
 
(13,327
)
 
(12,364
)
 
 
 
 
 
 
 
 
$
3,818,560

 
$
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 debts issued at a subsidiary level whether or not collateralized 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.
Short-term obligations of
$848,042
for which the maturity has been extended beyond 12 months subsequent to the end of the period or that are expected to be refinanced using the long-term credit facilities are presented as long-term debt.


Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
March 31, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

7.
Long-term debt (continued)
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.
(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.
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
 
OPEB
 
Three Months Ended March 31
 
Three Months Ended March 31
 
2018
 
2017
 
2018
 
2017
Service cost
$
3,614

 
$
3,600

 
$
1,487

 
$
1,278

Interest cost
4,555

 
4,987

 
1,625

 
1,672

Expected return on plan assets
(7,005
)
 
(6,308
)
 
(1,849
)
 
(1,620
)
Amortization of net actuarial loss (gain)
111

 
267

 
(38
)
 
(36
)
Amortization of prior service credits
(156
)
 
(156
)
 
(65
)
 
(65
)
Loss on curtailments and settlements

 
1,007

 

 

Amortization of regulatory assets/liability
2,563

 
2,663

 
561

 
129

Net benefit cost
$
3,682

 
$
6,060

 
$
1,721

 
$
1,358

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
$2,540
of non-service costs for the
three months ended
March 31
, 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
March 31, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

9.
Other long-term liabilities and deferred credits
Other long-term liabilities consist of the following: 
 
March 31, 2018
 
December 31, 2017
Advances in aid of construction
$
62,901

 
$
62,683

Environmental remediation obligation
53,838

 
54,322

Asset retirement obligations
44,835

 
44,166

Customer deposits
28,498

 
28,529

Unamortized investment tax credits
17,923

 
17,839

Deferred credits
21,088

 
21,168

Other
41,117

 
44,463

 
270,200

 
273,170

Less current portion
(41,918
)
 
(45,903
)
 
$
228,282

 
$
227,267

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

Issuance of common shares upon exercise of share options, net of withholding taxes
 
86,354

Conversion of convertible debentures
 
19,917

Issuance of shares under the dividend reinvestment plan
 
1,063,572

Exercise of share-based awards
 
197,205

Common shares, end of period
 
433,132,983

Subsequent to quarter end, 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
three months
ended
March 31, 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
March 31, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

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.
10.
Shareholders’ capital (continued)
(b)
Share-based compensation (continued)
In March 2018, 331,483 Performance Share Units ("PSUs") were granted to executives of the Company. The PSUs vest on January 1, 2021. During the 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.
During the
three months
ended
March 31, 2018
, 21,367 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 months
ended
March 31, 2018
, APUC recorded
$1,583
(
2017
-
$1,706
) 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
March 31, 2018
, total unrecognized compensation costs related to non-vested options and PSUs were
$1,686
and
$8,721
, respectively, and are expected to be recognized over a period of
1.39
and
2.04
years, respectively.
11.
Accumulated other comprehensive income (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
(2,423
)
 
(2,440
)
 

 

 
(4,863
)
Amounts reclassified

 
(1,311
)
 


(102
)
 
(1,413
)
Net current period OCI
$
(2,423
)
 
$
(3,751
)
 
$

 
$
(102
)
 
$
(6,276
)
Balance, March 31, 2018
$
(50,123
)
 
$
63,271

 
$

 
$
(12,258
)
 
$
890

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.


Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
March 31, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

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 period were as follows:
 
Three Months Ended March 31
 
2018
 
2017
 
Dividend
 
Dividend per share
 
Dividend
 
Dividend per share
Common shares
$
50,620

 
$
0.1165

 
$
45,135

 
$
0.1165

Series A preferred shares
$
1,068

 
$
0.2224

 
$
1,021

 
$
0.2126

Series D preferred shares
$
988

 
$
0.2471

 
$
945

 
$
0.2362

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
$994
(
2017
-
$747
) during the
three months ended March 31, 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 the first quarter of 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 and Redeemable non-controlling interest
Net loss attributable to non-controlling interests for
three months ended
March 31
, 2018 and 2017 consists of the following:
 
2018
 
2017
HLBV and other adjustments attributable to:
 
 
 
Non-controlling interest - Class A partnership units
$
(76,771
)
 
$
(13,436
)
Non-controlling interest - redeemable Class A partnership units
(3,334
)
 
(2,651
)
Other net earnings attributable to non-controlling interests
693

 
802

Net effect of non-controlling interests
$
(79,412
)
 
$
(15,285
)

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.


Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
March 31, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

15.
Income taxes
For the
three months ended
March 31, 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
three months ended
March 31, 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
.
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 subscription receipts 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
three months ended
March 31
are as follows:
 
2018
 
2017
Net earnings attributable to shareholders of APUC
$
17,598

 
$
19,297

Series A Preferred shares dividend
1,068

 
1,021

Series D Preferred shares dividend
988

 
945

Net earnings attributable to common shareholders of APUC from continuing operations – Basic and Diluted
$
15,542

 
$
17,331

Weighted average number of shares
 
 
 
Basic
432,821,235

 
343,549,831

Effect of dilutive securities
3,868,218

 
3,102,922

Diluted
436,689,453

 
346,652,753

The shares potentially issuable as a result of
2,328,343
share options (
2017
-
1,129,168
) are excluded from this calculation as they are anti-dilutive.


Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
March 31, 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 March 31, 2018
 
Liberty Power Group
 
Liberty Utilities Group
 
Corporate
 
Total
Revenue
(1)(2)
$
70,557

 
$
424,280

 
$

 
$
494,837

Fuel, power and water purchased
8,931

 
163,359

 

 
172,290

Net revenue
61,626

 
260,921

 

 
322,547

Operating expenses
18,648

 
102,474

 

 
121,122

Administrative expenses
3,579

 
8,845

 
160

 
12,584

Depreciation and amortization
23,642

 
44,745

 
262

 
68,649

Loss on foreign exchange

 

 
201

 
201

Operating income
15,757

 
104,857

 
(623
)
 
119,991

Interest expense
8,450

 
25,636

 
1,414

 
35,500

Interest, dividend, equity and other income
(8,761
)
 
(1,400
)
 
(500
)
 
(10,661
)
Change in value of investment carried at fair value

 

 
117,004

 
117,004

Other
117

 
(1,228
)
 
8,017

 
6,906

Earnings (loss) before income taxes
$
15,951

 
$
81,849

 
$
(126,558
)
 
$
(28,758
)
Property, plant and equipment
$
2,219,472

 
$
4,052,153

 
$
33,366

 
$
6,304,991

Equity-method investees
33,957

 
935

 
275

 
35,167

Total assets
3,110,318

 
5,840,807

 
(9,360
)
 
8,941,765

Capital expenditures
61,985

 
96,189

 

 
158,174


(1)
Revenues include $8,384 related to hedging gains for the three months ended March 31, 2018 that do not represent revenues recognized from contracts with customers.
(2)
Liberty Utilities Group revenues include $631 related to alternative revenue programs for the three months ended March 31, 2018 that do not represents revenues recognized from contracts with customers.


Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
March 31, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

17.
Segmented information (continued)
 
Three Months Ended March 31, 2017
 
Liberty Power Group
 
Liberty Utilities Group
 
Corporate
 
Total
Revenue
$
57,949

 
$
363,726

 
$

 
$
421,675

Fuel and power purchased
5,526

 
118,241

 

 
123,767

Net revenue
52,423

 
245,485

 

 
297,908

Operating expenses
14,505

 
95,514

 

 
110,019

Administrative expenses
3,303

 
7,135

 
667

 
11,105

Depreciation and amortization
19,771

 
42,473

 
253

 
62,497

Gain on foreign exchange

 

 
(42
)
 
(42
)
Operating income
14,844

 
100,363

 
(878
)
 
114,329

Interest expense
8,358

 
20,727

 
19,768

 
48,853

Interest, dividend and other income
(921
)
 
(996
)
 
(561
)
 
(2,478
)
Other
1,194

 
2,587

 
45,804

 
49,585

Earnings (loss) before income taxes
$
6,213

 
$
78,045

 
$
(65,889
)
 
$
18,369

Capital expenditures
13,735

 
142,153

 

 
155,888

 
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 March 31
 
2018
 
2017
Revenue
 
 
 
Canada
$
19,286

 
$
19,314

United States
475,551

 
402,361

 
$
494,837

 
$
421,675

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
March 31, 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
March 31,
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)
$
49,526

$
12,416

$
10,950

$
11,170

$
11,395

$
199,902

$
295,359

Gas supply and service agreements (ii)
72,300

53,142

35,693

22,601

17,662

39,793

241,191

Service agreements
36,702

38,234

38,709

38,638

37,293

336,440

526,016

Capital projects
27,954

1,000





28,954

Operating leases
8,700

7,866

7,466

7,484

7,334

185,501

224,351

Total
$
195,182

$
112,658

$
92,818

$
79,893

$
73,684

$
761,636

$
1,315,871

(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
March 31,
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 March 31
 
2018
 
2017
Accounts receivable
$
(16,037
)
 
$
7,671

Fuel and natural gas in storage
16,220

 
8,231

Supplies and consumable inventory
(1,947
)
 
(1,102
)
Income taxes recoverable
(8
)
 
(982
)
Prepaid expenses
(3,253
)
 
(1,115
)
Accounts payable
(40,055
)
 
(62,569
)
Accrued liabilities
(15,483
)
 
14,511

Current income tax liability
690

 
694

Net regulatory assets and liabilities
(3,095
)
 
(6,716
)
 
$
(62,968
)
 
$
(41,377
)


Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
March 31, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)

20.
Financial instruments
(a)
Fair value of financial instruments
March 31, 2018
Carrying
amount
 
Fair
value
 
Level 1
 
Level 2
 
Level 3
Notes receivable
$
74,096

 
$
83,027

 
$

 
$
83,027

 
$

Investment in Atlantica
490,563

 
490,563

 
490,563

 

 

Derivative instruments
(1)
:
 
 
 
 
 
 
 
 
 
Energy contracts designated as a cash flow hedge
58,600

 
58,600

 

 

 
58,600

Commodity contracts for regulated operations
39

 
39

 

 
39

 

Transmission congestion rights
2,370

 
2,370

 

 
2,370

 

Total derivative instruments
61,009

 
61,009

 

 
2,409

 
58,600

Total financial assets
$
625,668

 
$
634,599

 
$
490,563

 
$
85,436

 
$
58,600

Long-term debt
$
3,831,887

 
$
3,919,948

 
$
627,699

 
$
3,292,249

 
$

Convertible debentures
788

 
996

 
996

 

 

Preferred shares, Series C
14,323

 
14,819

 

 
14,819

 

Derivative instruments:
 
 
 
 
 
 
 
 
 
Energy contracts designated as a cash flow hedge
601

 
601

 

 

 
601

Energy contracts not designated as a cash flow hedge

37

 
37

 

 
37

 

Cross-currency swap designated as a net investment hedge
62,341

 
62,341

 

 
62,341

 

Interest rate swap designated as a hedge
7,564

 
7,564

 

 
7,564

 

Currency forward contract not designated as a hedge
13

 
13

 

 
13

 

Commodity contracts for regulated operations
2,497

 
2,497

 

 
2,497

 

Total derivative instruments
73,053

 
73,053

 

 
72,452

 
601

Total financial liabilities
$
3,920,051

 
$
4,008,816

 
$
628,695

 
$
3,379,520

 
$
601

(1) Balance of $311 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
March 31, 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

 

Transmission congestion rights
6,227

 
6,227

 

 
6,227

 

Total derivative instruments
69,773

 
69,773

 

 
6,410

 
63,363

Total financial assets
$
103,151

 
$
107,965

 
$

 
$
44,602

 
$
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
March 31, 2018 and 2017
(in thousands of US dollars, except as noted and per share amounts)




Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
March 31, 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
March 31,
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. Transmission congestion rights positions are fair valued using the most recent monthly auction clearing prices.
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 $18.11 to $199.91 with a weighted average of $26.28 as of
March 31,
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 months ended
March 31,
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
2,384,434

Forward contracts
11,920,000

 
14,304,434




Algonquin Power & Utilities Corp.
Notes to the Unaudited Interim Consolidated Financial Statements
March 31, 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. Most of 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: 
 
 
March 31, 2018
 
 
December 31, 2017
Regulatory assets: