Algonquin Power & Utilities Corp. – Consolidated Financial Statements ALGONQUIN POWER & UTILITIES CORP.  Notes to the Consolidated Financial Statements  December 31, 2012 and 2011   (in thousands of Canadian dollars except as noted and amounts per share)  24. Financial instruments (continued) (a) Fair value of financial instruments (continued)  x Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or  liabilities accessible to the reporting entity at the measurement date. x Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for  the asset or liability, either directly or indirectly, for substantially the full term of the asset  or liability. x Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to  the extent that observable inputs are not available, thereby allowing for situations in  which there is little, if any, market activity for the asset or liability at measurement date. 2012 Annual Report 132 The Company has determined that the carrying value of its short-term financial assets and  liabilities approximates fair value (a level 2 measurement) at December 31, 2012 and 2011  due to the short-term maturity of these instruments.  Notes receivable fair values 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. Such estimate is significantly influenced by unobservable  data and therefore this fair value is subject to estimation risk.  APUC has long-term liabilities at fixed interest rates and variable rates. The estimated fair  value is calculated using current interest rates. The fair value of convertible debentures is  determined using quoted market price. The Company utilizes valuation techniques that maximize the use of observable inputs and  minimize the use of unobservable inputs to the extent possible. The Company determines fair  value based on assumptions that market participants would use in pricing an asset or liability  in the principle or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes  between observable and unobservable inputs, which are categorized in one of the following  levels: 2011  Carrying amount Fair Value  Level 1  Level 2  Level 3  Notes receivable  $24,534  $24,534 $ - $ -  $24,534 Total financial assets  $24,534  $24,534 $ - $ -  $24,534 Long-term liabilities  $332,716  $338,264 $ -  $338,264  $ - Convertible debentures  122,297  162,195 162,195 -  - Derivative financial  instruments:  Interest rate swaps not  designated as a hedge  6,975  6,975 - 6,975  - Energy derivative  contracts  1,169  1,169 -  1,169  - Total derivative financial  instruments 8,144 8,144 - 8,144 - Total financial liabilities  $463,157  $508,603  $162,195   $346,408 $ - 