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)  14.  Shareholders’ capital (continued)  (c)  Share-based compensation (continued)  i) Stock option plan  2012 Annual Report 115 The estimated fair value of options, including the effect of estimated forfeitures, is recognized  as expense on a straight-line basis over the options’ vesting periods while ensuring that the  cumulative amount of compensation cost recognized at least equals the value of the vested  portion of the award at that date. The Company determines the fair value of options granted  using the Black-Scholes option-pricing model. The risk-free interest rate is based on the zero- coupon Canada Government bond with a similar term to the expected life of the options at the  grant date. Expected volatility was estimated based on the adjusted historic volatility of the  Company’s shares. The expected life was estimated to equal the contractual life of the  options. The dividend yield rate was based upon recent historical dividends paid on APUC  shares. In the case of qualified retirement, the Board may accelerate the vesting of the unvested  options then held by the optionee at the Board’s discretion. All vested options may be exercised  within ninety days after retirement. In the case of death, the options vest immediately and the  period over which the options can be exercised is one year. In the case of disability, options  continue to vest and be exercisable in accordance with the terms of the grant and the  provisions of the plan. Employees have up to thirty days to exercise vested options upon  resignation or termination. The Company’s stock option plan (the “Plan”) permits the grant of share options to key officers,  directors, employees and selected service providers. The aggregate number of shares that may  be reserved for issuance under the Plan must not exceed 10% of the number of Shares  outstanding at the time the options are granted. The number of shares subject to each option,  the option price, the expiration date, the vesting and other terms and conditions relating to each  option shall be determined by the Board from time to time. Dividends on the underlying shares  do not accumulate during the vesting period. Option holders may elect to surrender any portion  of the vested options which is then exercisable in exchange for the In-the-Money Amount. In  accordance with the Plan, the In-The-Money Amount represents the excess, if any, of the  market price of a share at such time over the option price, in each case such In-the-Money  amount being payable by the Company in cash or shares at the election of the Company. As  the Company does not expect to settle these instruments in cash, these options are accounted  for as equity awards.  As at December 31, 2012, total unrecognized compensation costs related to non-vested options  and share unit awards were $1,724 and $219 respectively, and are expected to be recognized  over a period of 1.67 years and 1.80 years respectively.  No tax deduction was realized in the current year. The compensation expense is recorded as part  of administrative expenses in the Consolidated Statement of Operations. The portion of share-based  compensation costs capitalized as cost of construction is insignificant. 