| Financial instruments | Financial instruments (a) Fair value of financial instruments June 30, 2022 Carrying Fair Level 1 Level 2 Level 3 Long-term investments carried at fair value $ 1,663,092 $ 1,663,092 $ 1,581,586 $ — $ 81,506 Development loans and other receivables 95,196 93,161 — 93,161 — Derivative instruments: Interest rate swap designated as a hedge 45,728 45,728 — 45,728 — Energy contracts not designated as cash flow hedge 513 513 — — 513 Congestion revenue rights designated as a cash flow hedge 2,690 2,690 — — 2,690 Congestion revenue rights not designated as a cash flow hedge 2,248 2,248 — — 2,248 Commodity contracts for regulated operations 1,719 1,719 — 1,719 — Cross-currency swap designated as a cash flow hedge 78 78 — 78 — Total derivative instruments 52,976 52,976 — 47,525 5,451 Total financial assets $ 1,811,264 $ 1,809,229 $ 1,581,586 $ 140,686 $ 86,957 Long-term debt $ 7,455,134 $ 7,063,790 $ 2,855,182 $ 4,208,608 $ — Notes payable to related party 25,808 25,808 — 25,808 — Convertible debentures 261 473 473 — — Preferred shares, Series C 12,738 12,465 — 12,465 — Derivative instruments: Energy contracts designated as a cash flow hedge 126,114 126,114 — — 126,114 Energy contracts not designated as a cash flow hedge 1,005 1,005 — — 1,005 Cross-currency swap designated as a net investment hedge 35,763 35,763 — 35,763 — Cross-currency swap designated as a cash flow hedge 16,699 16,699 — 16,699 — Interest rate swaps designated as a hedge 255 255 — 255 — Interest rate swaps not designated as a hedge 4,655 4,655 — 4,655 — Commodity contracts for regulated operations 2,536 2,536 — 2,536 — Total derivative instruments 187,027 187,027 — 59,908 127,119 Total financial liabilities $ 7,680,968 $ 7,289,563 $ 2,855,655 $ 4,306,789 $ 127,119 21. Financial instruments (continued) (a) Fair value of financial instruments (continued) December 31, 2021 Carrying Fair Level 1 Level 2 Level 3 Long-term investment carried at fair value $ 1,848,456 $ 1,848,456 $ 1,753,210 $ — $ 95,246 Development loans and other receivables 32,261 33,286 — 33,286 — Derivative instruments: Energy contracts designated as a cash flow hedge 15,362 15,362 — — 15,362 Interest rate swap designated as a hedge 1,581 1,581 — 1,581 — Commodity contracts for regulatory operations 1,721 1,721 — 1,721 — Cross-currency swap designated as a net investment hedge 1,958 1,958 — 1,958 — Total derivative instruments 20,622 20,622 — 5,260 15,362 Total financial assets $ 1,901,339 $ 1,902,364 $ 1,753,210 $ 38,546 $ 110,608 Long-term debt $ 6,211,375 $ 6,543,932 $ 2,418,580 $ 4,125,352 — Notes payable to related party 25,808 25,808 — 25,808 — Convertible debentures 277 519 519 — — Preferred shares, Series C 13,348 14,580 — 14,580 — Derivative instruments: Energy contracts designated as a cash flow hedge 60,462 60,462 — — 60,462 Energy contracts not designated as a cash flow hedge 1,169 1,169 — — 1,169 Cross-currency swap designated as a net investment hedge 50,258 50,258 — 50,258 — Interest rate swaps 7,008 7,008 — 7,008 — Commodity contracts for regulated operations 1,348 1,348 — 1,348 — Total derivative instruments 120,245 120,245 — 58,614 61,631 Total financial liabilities $ 6,371,053 $ 6,705,084 $ 2,419,099 $ 4,224,354 $ 61,631 The Company has determined that the carrying value of its short-term financial assets and liabilities approximates fair value as at June 30, 2022 and December 31, 2021 due to the short-term maturity of these instruments. 21. Financial instruments (continued) (a) Fair value of financial instruments (continued) The fair value of development loans and other receivables (level 2) is 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 NASDAQ stock exchange. The Company’s level 1 fair value of long-term debt is measured at the closing price on the NYSE and the over-the-counter closing price. 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 of convertible debentures has been determined as the greater of their face value and the quoted value of AQN's common shares on a converted basis. The Company’s level 2 fair value derivative instruments primarily consist of swaps, options, rights, subscription agreements and forward physical derivatives 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, congestion revenue rights ("CRRs") and the fair value of the Company's investment in AYES Canada. The significant unobservable inputs used in the fair value measurement of energy contracts are the internally developed forward market prices ranging from $19.84 to $180.57 with a weighted average of $42.72 as at June 30, 2022. The weighted average forward market prices are developed based on the quantity of energy expected to be sold monthly and the expected forward price during that month. The change in the fair value of the energy contracts is detailed in notes 21(b)(ii) and 21(b)(iv). The significant unobservable inputs used in the fair value measurement of CRRs are recent CRR auction prices ranging from $1.87 to $11.79 with a weighted average of $4.49 as of June 30, 2022. The significant unobservable inputs used in the fair value measurement of the Company's AYES Canada investment are the expected cash flows, the discount rates applied to these cash flows ranging from 9.21% to 9.71% with a weighted average of 9.59%, and the expected volatility of Atlantica's share price ranging from 25% to 37% as at June 30, 2022. Significant increases (decreases) in expected cash flows or increases (decreases) in discount rate in isolation would have resulted in a significantly lower (higher) fair value measurement. (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: June 30, 2022 Financial contracts: Swaps 2,882,075 Options 113,504 2,995,579 21. 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. Most of the gains or losses on the settlement of these contracts are included in the calculation of the fuel and commodity costs adjustments (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. (ii) Cash flow hedges The Company has sought to reduce the price risk on the expected future sale of power generation at the Sandy Ridge, Senate, Minonk, and Sugar Creek Wind Facilities by entering into the following long-term energy derivative contracts. Notional quantity Expiry Receive average Pay floating price 4,297,565 September 2030 $24.54 Illinois Hub 463,336 December 2028 $30.62 PJM Western HUB 2,194,497 December 2027 $22.86 NI HUB 1,803,817 December 2027 $36.46 ERCORT North HUB 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, AQN anticipates having to purchase a portion of its energy requirements at the ISO NE spot rates to supplement self-generated energy. The Company seeks to mitigate the risk by using short-term financial forward energy purchase contracts. These short-term derivatives are not accounted for as hedges and changes in fair value are recorded in earnings as they occur (note 21(b)(iv)). A prior contract used as a hedging instrument expired in February 2022. The Company is party to two interest rate swap contracts as cash flow hedges to mitigate the risk that LIBOR-based interest rates will increase over the life of term loan facilities. Under the terms of the interest rate swap contracts, the Company has fixed its LIBOR interest rate expense on $87,627 and $8,875 to 3.28% and 3.02%, respectively, on its two term loan facilities. The fair value of the derivative on the designation date is amortized into earnings over the remaining life of the contract. The Company is party to a forward-starting interest rate swap in order to reduce the interest rate risk related to the quarterly interest payments between July 1, 2024 and July 1, 2029 on the $350,000 subordinated unsecured notes and between April 18, 2027 and April 18, 2032 on the $750,000 subordinated unsecured notes. The Company designated the entire notional amount of the pay-variable and receive-fixed interest rate swaps as a hedge of the future quarterly variable-rate interest payments associated with the subordinated unsecured notes. In January 2022, the Company entered into a cross-currency interest rate swap, coterminous with the Canadian Notes, to effectively convert the C$400,000 Canadian Offering into U.S. dollars. The change in the carrying amount of the Canadian Notes due to changes in spot exchange rates is recognized each period in the unaudited interim consolidated statements of operations as loss (gain) on foreign exchange. The Company designated the entire notional amount of the cross-currency fixed-for-fixed interest rate swap as a hedge of the foreign currency exposure related to cash flows for the interest and principal repayments on the Canadian Notes. An offsetting portion of the AOCI balance related to changes in fair value of the cross-currency fixed-for-fixed interest rate swap attributable to changes in the spot exchange rates is also immediately reclassified into earnings. 21. 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 2022 2021 2022 2021 Effective portion of cash flow hedge $ (20,298) $ (32,436) $ (81,852) $ (63,167) Amortization of cash flow hedge (3,828) (214) (3,992) (1,112) Amounts reclassified from AOCI 11,247 859 14,079 40,132 OCI attributable to shareholders of AQN $ (12,879) $ (31,791) $ (71,765) $ (24,147) The Company expects $43,250 of u n realized losses currently in AOCI to be reclassified, net of taxes into non-regulated energy sales, investment loss, interest expense and derivative gains, within the next 12 months, as the underlying hedged transactions settle. (iii) Foreign exchange hedge of net investment in foreign operation The functional currency of most of AQN's operations is the U.S. dollar. The Company designates obligations denominated in Canadian dollars as a hedge of the foreign currency exposure of its net investment in its Canadian investments and subsidiaries. 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 $395 and $220 for the three and six months ended June 30, 2022, respectively (2021 - loss of $178 and $446, respectively) was recorded in OCI. On May 23, 2019, the Company entered into a cross-currency swap, coterminous with the subordinated unsecured notes, to effectively convert the $350,000 U.S.-dollar-denominated offering into Canadian dollars. The change in the carrying amount of the notes due to changes in spot exchange rates is recognized each period in the unaudited interim consolidated statements of operations as loss (gain) on foreign exchange. The Company designated the entire notional amount of the cross-currency fixed-for-fixed interest rate swap as a hedge of the foreign currency exposure related to cash flows for the interest and principal repayments on the notes. Upon the change in functional currency of AQN to the U.S. dollar on January 1, 2020, this hedge was dedesignated. The OCI related to this hedge will be amortized into earnings in the period that future interest payments affect earnings over the remaining life of the original hedge. The Company redesignated this swap as a hedge of AQN's net investment in its Canadian subsidiaries. The related foreign currency transaction gain or loss designated 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. The fair value of the derivative on the redesignation date will be amortized over the remaining life of the original hedge. A foreign currency gain of $10,697 and $6,465 for the three and six months ended June 30, 2022, respectively (2021 - loss of $7,453 and $11,467, respectively) was recorded in OCI. 21. Financial instruments (continued) (b) Derivative instruments (continued) (iii) Foreign exchange hedge of net investment in foreign operation (continued) Canadian operations The Company is exposed to currency fluctuations from its Canadian-based operations. AQN seeks to manage 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. 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 obligations denominated in U.S. dollars as a hedge of the foreign currency exposure of its net investment in its U.S. investments and subsidiaries. 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 loss of $2,149 and $2,544 for the three and six months ended June 30, 2022, respectively (2021 - gain of $70 and $1,991, respectively) was recorded in OCI. The Company was party to C$500,000 cross-currency swaps to effectively convert Canadian dollar debentures 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 Renewable Energy 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. A loss of $8,132 and $6,080 for the three and six months ended June 30, 2022, respectively (2021 - gain of $6,534 and $13,274, respectively) was recorded in OCI. During the six months ended June 30, 2022, the Renewable Energy Group settled the related cross-currency swap related to its C$200,000 debenture that was repaid (note 7(c)). On April 9, 2021, the Renewable Energy Group entered into a fixed-for-fixed cross-currency interest rate swap, coterminous with the senior unsecured debentures (note 7(b)), to effectively convert the C$400,000 Canadian-dollar-denominated offering into U.S. dollars. The Renewable Energy Group designated the entire notional amount of the fixed-for-fixed cross-currency interest rate swap as a hedge of the foreign currency exposure of its net investment in its U.S. operations. The gain or loss related to the fair value changes of the swap are reported in the same manner as the translation adjustment (in OCI) related to the net investment. A loss of $8,439 and $14,252 for the three and six months ended June 30, 2022, respectively (2021 - loss of $2,653 and $2,653, respectively) was recorded in OCI. Chilean operations The Company is exposed to currency fluctuations from its Chilean-based operations. The Company's Chilean operations are determined to have the Chilean peso as their functional currency. Chilean long-term debt used to finance the operations is denominated in Chilean Unidad de Fomento. (iv) Other derivatives 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. For derivatives that are not designated as hedges, the changes in the fair value are immediately recognized in earnings. 21. 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 2022 2021 2022 2021 Change in unrealized loss on derivative financial instruments: Interest rate swaps $ (4,680) $ — $ (4,680) $ — Energy derivative contracts $ (2,352) $ (2,305) $ (3,103) $ (2,627) Total change in unrealized loss on derivative financial instruments $ (7,032) $ (2,305) $ (7,783) $ (2,627) Realized gain (loss) on derivative financial instruments: Energy derivative contracts (157) 196 149 359 Total realized gain (loss) on derivative financial instruments $ (157) $ 196 $ 149 $ 359 Loss on derivative financial instruments not accounted for as hedges (7,189) (2,109) (7,634) (2,268) Amortization of AOCI gains frozen as a result of hedge dedesignation 1,054 755 1,750 2,003 $ (6,135) $ (1,354) $ (5,884) $ (265) Amounts recognized in the consolidated statements of operations consist of: Loss on derivative financial instruments $ (6,135) $ (1,354) $ (5,884) $ (265) (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 to 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. This note provides disclosures relating to the nature and extent of the Company’s exposure to risks arising from financial instruments, including credit risk and liquidity risk, and how the Company manages those risks. |
