b) Letters of Credit and Surety Bonds
As at December 31, 2012, Newalta had issued letters of credit and surety bonds in respect of compliance with environmental licenses in the amount of $16.0 million and $43.8 million, respectively ($21.3 million and $38.3 million as at December 31, 2011).
NOTE 17. FINANCIAL INSTRUMENTS
Fair Value of Financial Assets and Liabilities
Newalta's financial instruments include cash, bank indebtedness, accounts and other receivables, other assets, accounts payable and accrued liabilities, dividends payable, senior secured debt and senior unsecured debentures. The fair values of Newalta's financial instruments that are included in the consolidated balance sheets, with the exception of the debentures, approximate their recorded amount due to the short-term nature of those instruments for cash, bank indebtedness, accounts and other receivable, accounts payable and accrued liabilities, dividends payable, senior secured debt and the note receivable, due to the floating nature of the interest rate applicable to these instruments. The fair values incorporate an assessment of credit risk. The carrying values of Newalta's financial instruments at December 31, 2012 are as follows:
---------------------------------------------------------------------------- Total Loans and Other carrying FVTPL receivables AFS liabilities value----------------------------------------------------------------------------Cash 409 - - - 409Accounts and other receivables - 150,347 - - 150,347Other assets - - 547 - 547Other long-term assets(1) 14,138 388 - - 14,526Accounts payable and accrued liabilities - - - 181,867 181,867Dividends payable - - - 5,426 5,426Senior secured debt - - - 76,500 76,500----------------------------------------------------------------------------(1) Excludes non-financial instruments.
The fair value of the unsecured senior debentures is based on open market quotation as follows:
----------------------------------------------------------------------------As at December 31, 2012 Carrying value Quoted fair value----------------------------------------------------------------------------7.625% series 1 senior unsecured debentures due November 23, 2017 125,376 133,750----------------------------------------------------------------------------7.75% series 2 senior unsecured debentures due November 14, 2019 125,322 135,313----------------------------------------------------------------------------
Embedded Derivatives
The senior unsecured debentures have early redemption features at values based on percentages of the principal amount plus accrued and unpaid interest. Due to the redemption rates being fixed, an embedded derivative exists when compared to current market rates. Newalta estimates the fair value of the embedded derivatives using a valuation model that considers the current bond prices and spreads associated with the senior unsecured debentures. Newalta has recognized gains of $1.3 million and $13.4 million for the three months and year ended December 31, 2012, respectively (for the three months and year ended December 31, 2011 - nil) and has determined the fair value of the embedded derivative for the senior unsecured debentures to be $14.1 million as at December 31, 2012. A corresponding embedded derivative asset was included within other long-term assets on the balance sheet. Subsequent changes in fair value will be included in finance charges on the consolidated statements of operations.
