Accounting for derivative instruments and hedging activities

6 Months Ended

Jun. 30, 2020

Accounting for derivative instruments and hedging activities

Accounting for derivative instruments and hedging activities

7. Accounting for derivative instruments and hedging activities

We recognize all derivative instruments on the balance sheet as either assets or liabilities and measure them at fair value in each reporting period. We have one contract designated as a cash flow hedge, and we defer the effective portion of the change in fair value of the derivatives in accumulated other comprehensive income (loss), until the hedged transactions occur and are recognized in earnings (loss). The ineffective portion of a cash flow hedge is immediately recognized in earnings (loss). For our other derivatives that are not designated as cash flow hedges, the changes in the fair value are immediately recognized in earnings (loss). These guidelines apply to our natural gas swaps, interest rate swaps, and foreign exchange contracts.

Gas purchase and sale agreements

We have a gas purchase agreement at our Nipigon project that expires on December 31, 2022 under which we purchase a minimum of 6,500 Gigajoules (“Gj”) of natural gas per day at a price of Cdn$4.57 per Gj. This agreement does not qualify for the normal purchase normal sales (“NPNS”) exemption and is accounted for as a derivative financial instrument because we could not conclude that it is probable that this contract will not settle net and will result in physical delivery. This derivative financial instrument is recorded in the condensed consolidated balance sheets at fair value and the changes in its fair market value are recorded in the condensed consolidated statements of operations. We

also have a corresponding gas sales agreement at Nipigon, whereby 6,500 Gj of natural gas per day is sold at the spot market price. This contract is not accounted for as a derivative.

On May 15, 2020, we also entered into natural gas purchase agreements at our Morris project for approximately 700,000 MMBtu from January 2021 through February 2021 to effectively mitigate seasonal fluctuations of future natural gas prices. This contract is accounted for as a derivative financial instrument and is recorded in the condensed consolidated balance sheet at fair value. Changes in the fair market value of this contract are recorded in the condensed consolidated statement of operations.

Natural gas swaps

Our strategy to mitigate future exposure to changes in natural gas prices at our projects consists of periodically entering into financial swaps that effectively fix the price of natural gas expected to be purchased at these projects. These natural gas swaps are derivative financial instruments and are recorded in the condensed consolidated balance sheets at fair value and the changes in their fair market value are recorded in the condensed consolidated statements of operations.

We have entered into various natural gas swaps to effectively fix the price of 14.5 million MMBtu of future natural gas purchases at our Orlando project, which is approximately 100% of our share of the expected natural gas purchases in 2020 through 2023. These contracts are accounted for as derivative financial instruments and are recorded in the condensed consolidated balance sheet at fair value at June 30, 2020. Changes in the fair market value of these contracts are recorded in the condensed consolidated statement of operations.

Interest rate swaps

APLP Holdings has entered into several interest rate swap agreements to mitigate its exposure to changes in interest at the Adjusted Eurodollar Rate. At June 30, 2020, these agreements totaled $345 million notional amount of the remaining $345 million aggregate principal amount of borrowings under the senior secured term loan facility (“Term Loan Facility”). These interest rate swap agreements expire at various dates through March 31, 2022. Borrowings under the $700.0 million Term Loan Facility bear interest at a rate equal to the Adjusted Eurodollar Rate plus an applicable margin of 2.50%. Based on the terms of the Term Loan Facility, the Adjusted Eurodollar Rate cannot be less than 1.00%, resulting in a minimum of a 3.50% all-in rate on the Term Loan Facility for the non-swapped portion of the remaining principal amount. The weighted average rate of these swap agreements is 2.21%, resulting in an all-in rate of approximately 4.71% for $345.0 million of the Term Loan Facility.

The Cadillac project has an interest rate swap agreement that effectively fixes the interest rate at 6.3% through February 15, 2023, and 6.4% thereafter. The notional amount of the interest rate swap agreement matches the outstanding principal balance over the remaining life of the Cadillac Term Loan. This swap agreement, which qualifies for and is designated as a cash flow hedge, is effective through June 2025 and the effective portion of the changes in the fair market value is recorded in accumulated other comprehensive income (loss).

Foreign currency forward contracts

We use foreign currency forward contracts to manage our exposure to changes in foreign exchange rates as we generate cash flow in U.S. dollars and Canadian dollars. We currently have Canadian dollar payment obligations for preferred dividends, interest on our Canadian dollar-denominated convertible debentures and our Medium Term Notes due June 23, 2036 (“MTNs”). Principal and interest payments for our Term Loan are made in U.S. dollars. We have a hedging strategy for the purpose of mitigating the currency risk impact on the future interest and principal payments, preferred dividends and other working capital requirements. Foreign currency forward contracts are not designated as

hedges, and changes in their market value are recorded in foreign exchange on the condensed consolidated statements of operations. As of June 30, 2020, we have no foreign currency forward contracts.

Volume of forecasted transactions

We have entered into derivative instruments in order to economically hedge the following notional volumes of forecasted transactions as summarized below, by type, excluding those derivatives that qualified for NPNS exemption at June 30, 2020 and December 31, 2019:


		June 30,	December 31,
	Units	2020	2019
Natural gas swaps	Natural Gas (MMBtu)	14.5	16.3
Gas purchase agreements	Natural Gas (Gigajoules)	6.6	6.4
Interest rate swaps	Interest (US$)	441.4	468.4

Fair value of derivative instruments

We disclose derivative instrument assets and liabilities on a trade-by-trade basis and do not offset amounts at the counterparty master agreement level. The following table summarizes the fair value of our derivative assets and liabilities:


	June 30, 2020
	Derivative		Derivative
	Assets		Liabilities
Derivative instruments designated as cash flow hedges:
Interest rate swaps current	$	—	$	0.6
Interest rate swaps long-term		—		1.3
Total derivative instruments designated as cash flow hedges		—		1.9
Derivative instruments not designated as cash flow hedges:
Interest rate swaps current		—		5.4
Interest rate swaps long-term		—		3.1
Natural gas swaps current		—		2.0
Natural gas swaps long-term		—		3.5
Gas purchase agreements current		—		4.1
Gas purchase agreements long-term		—		6.2
Convertible debenture conversion option		—		5.2
Total derivative instruments not designated as cash flow hedges		—		29.5
Total derivative instruments	$	—	$	31.4


	December 31, 2019
	Derivative		Derivative
	Assets		Liabilities
Derivative instruments designated as cash flow hedges:
Interest rate swaps current	$	—	$	0.4
Interest rate swaps long-term		—		1.1
Total derivative instruments designated as cash flow hedges		—		1.5
Derivative instruments not designated as cash flow hedges:
Interest rate swaps current				1.9
Interest rate swaps long-term		—		1.1
Natural gas swaps current		—		1.9
Natural gas swaps long-term		—		4.2
Gas purchase agreements current		0.7		4.6
Gas purchase agreements long-term		—		9.5
Convertible debenture conversion option		—		3.2
Total derivative instruments not designated as cash flow hedges		0.7		26.4
Total derivative instruments	$	0.7	$	27.9

Accumulated other comprehensive income

The following table summarizes the changes in the accumulated other comprehensive income (loss) (“OCI”) balance attributable to derivative financial instruments designated as a hedge, net of tax:


	Interest Rate
Three Months Ended June 30, 2020	Swaps
Accumulated OCI balance at April 1, 2020	$	1.3
Change in fair value of cash flow hedges		(0.1)
Realized from OCI during the period		0.1
Accumulated OCI balance at June 30, 2020	$	1.3

	Interest Rate
Three Months Ended June 30, 2019	Swaps
Accumulated OCI balance at April 1, 2019	$	1.5
Change in fair value of cash flow hedges		0.1
Realized from OCI during the period		(0.2)
Accumulated OCI balance at June 30, 2019	$	1.4

	Interest Rate
Six Months Ended June 30, 2020	Swaps
Accumulated OCI balance at January 1, 2020	$	1.6
Change in fair value of cash flow hedges		(0.5)
Realized from OCI during the period		0.2
Accumulated OCI balance at June 30, 2020	$	1.3

	Interest Rate
Six Months Ended June 30, 2019	Swaps
Accumulated OCI balance at January 1, 2019	$	1.6
Change in fair value of cash flow hedges		0.1
Realized from OCI during the period		(0.3)
Accumulated OCI balance at June 30, 2019	$	1.4

Impact of derivative instruments on the consolidated statements of operations

The following table summarizes realized loss (gain) for derivative instruments not designated as cash flow hedges:


	Classification of loss (gain)	Three Months Ended June 30,				Six Months Ended June 30,
	recognized in income	2020		2019		2020		2019
Gas purchase agreements	Fuel	$	1.9	$	2.0	$	4.1	$	4.0
Natural gas swaps	Fuel		0.9		0.2		1.6		(0.1)
Interest rate swaps	Interest, net		0.9		2.4		1.2		3.8

The following table summarizes the unrealized (loss) gain resulting from changes in the fair value of derivative financial instruments that are not designated as cash flow hedges:


	Classification of (loss) gain	Three Months Ended June 30,				Six Months Ended June 30,
	recognized in income	2020		2019		2020		2019
Natural gas swaps	Change in fair value of derivatives	$	1.1	$	(2.6)	$	0.6	$	(2.4)
Gas purchase agreements	Change in fair value of derivatives		1.4		0.2		2.4		(0.3)
Interest rate swaps	Change in fair value of derivatives		0.6		(4.6)		(5.5)		(6.7)
		$	3.1	$	(7.0)	$	(2.5)	$	(9.4)
Convertible debenture conversion option	Other (income) expense, net	$	(0.6)	$	(2.9)	$	2.0	$	1.8