Fair Value Measurements

12 Months Ended

Dec. 31, 2016

16. FAIR VALUE MEASUREMENTS

The Company is required to determine the fair value of all derivatives except those which qualify for the NPNS exemption (see note 15), and uses a market approach to do so. The three levels of the fair value hierarchy are defined as follows:

Level 1 - Where possible, the Company bases the fair valuation of its financial assets and liabilities on quoted prices in active markets (“quoted prices”) for identical assets and liabilities.

Level 2 - Where quoted prices for identical assets and liabilities are not available, the valuation of certain contracts must be based on quoted prices for similar assets and liabilities with an adjustment related to location differences. Also, certain derivatives are valued using quotes from over-the-counter clearing houses.

Level 3 - Where the information required for a Level 1 or Level 2 valuation is not available, derivatives must be valued using unobservable or internally-developed inputs. The primary reasons for a Level 3 classification are as follows:

While valuations were based on quoted prices, significant assumptions were necessary to reflect seasonal or monthly shaping and locational basis differentials.
The term of certain transactions extends beyond the period when quoted prices are available, and accordingly, assumptions were made to extrapolate prices from the last quoted period through the end of the transaction term.
The valuations of certain transactions were based on internal models, although quoted prices were utilized in the valuations.

Derivative assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The following tables set out the classification of the methodology used by the Company to fair value its derivatives:

As at		December 31, 2016
millions of Canadian dollars		Level 1		Level 2		Level 3		Total
Assets
Cash flow hedges
Power swaps	$	10	$	-	$	-	$	10
		10		-		-		10
Regulatory deferral
Commodity swaps and forwards
Coal purchases		-		74		-		74
Power purchases		7		-		-		7
Natural gas purchases and sales		8		25		-		33
Heavy fuel oil purchases		3		5		1		9
Foreign exchange forwards		-		106		-		106
		18		210		1		229
HFT derivatives
Power swaps and physical contracts		(7)		1		-		(6)
Natural gas swaps, futures, forwards, physical contracts and related transportation		-		4		39		43
		(7)		5		39		37
Total assets		21		215		40		276
Liabilities
Cash flow hedges
Power swaps		4		-		-		4
Foreign exchange forwards		-		23		-		23
		4		23		-		27
Regulatory deferral
Commodity swaps and forwards
Power purchases		4		-		-		4
Heavy fuel oil purchases		-		6		-		6
Natural gas purchases and sales		1		1		-		2
		5		7		-		12
HFT derivatives
Power swaps and physical contracts		12		5		-		17
Natural gas swaps, futures, forwards and physical contracts		4		24		389		417
		16		29		389		434
Other derivatives
Foreign exchange forwards		-		1		-		1
Interest rate swap		-		1		-		1
		-		2		-		2
Total liabilities		25		61		389		475
Net assets (liabilities)	$	(4)	$	154	$	(349)	$	(199)

As at		December 31, 2015
millions of Canadian dollars		Level 1		Level 2		Level 3		Total
Assets
Cash flow hedges
Power swaps	$	20	$	-	$	-	$	20
		20		-		-		20
Regulatory deferral
Commodity swaps and forwards
Coal purchases		-		1		-		1
Foreign exchange forwards		-		207		-		207
Physical natural gas purchases and sales		-		-		2		2
		-		208		2		210
HFT derivatives
Power swaps and physical contracts		38		1		(8)		31
Natural gas swaps, futures, forwards and physical contracts		-		8		57		65
		38		9		49		96

Other derivatives
Foreign exchange forwards		-		92		-		92
		-		92		-		92
Total assets		58		309		51		418
Liabilities
Cash flow hedges
Power swaps	$	5	$	-	$	-	$	5
Foreign exchange forwards		-		41		-		41
		5		41		-		46
Regulatory deferral
Commodity swaps and forwards
Coal purchases		-		16		-		16
Natural gas purchases and sales		1		-		-		1
Heavy fuel oil purchases		-		37		-		37
Foreign exchange forwards		-		10		-		10
		1		63		-		64
HFT derivatives
Power swaps and physical contracts		15		-		(2)		13
Foreign exchange options		-		4		-		4
Natural gas swaps, futures, forwards and physical contracts		14		22		279		315
		29		26		277		332
Other derivatives
Interest rate swaps		-		3		-		3
		-		3		-		3
Total liabilities		35		133		277		445
Net assets (liabilities)	$	23	$	176	$	(226)	$	(27)

The change in the fair value of the Level 3 financial assets for the year ended December 31, 2016 was as follows:

	Regulatory Deferral				Cash Flow Hedges and HFT Derivatives
millions of Canadian dollars	Oil Financial derivatives		Physical natural gas purchases and sales		Power		Naturalgas		Total
Balance, January 1, 2016	$	-	$	2	$	(8)	$	57	$	51
Increase (reduction) in benefit included in regulated fuel for generation and purchased power		-		(1)		-		-		(1)
Unrealized gains (losses) included in regulatory assets or liabilities		3		(1)		-		-		2
Total realized and unrealized gains (losses) included in non-regulated operating revenues		-		-		8		(18)		(10)
Net transfers out of Level 3		(2)		-		-		-		(2)
Balance, December 31, 2016	$	1	$	-	$	-	$	39	$	40

The change in the fair value of the Level 3 financial liabilities for the year ended December 31, 2016 was as follows:
	Regulatory Deferral				Cash Flow Hedges and HFT Derivatives
millions of Canadian dollars	Oil Financial derivatives		Physical natural gas purchases and sales		Power		Naturalgas		Total
Balance, January 1, 2016	$	-	$	-	$	(2)	$	279	$	277
Total realized and unrealized gains (losses) included in non-regulated operating revenues		-		-		2		110		112
Balance, December 31, 2016	$	-	$	-	$	-	$	389	$	389

The Company evaluates the observable input of market data on a quarterly basis in order to determine if transfers between levels is appropriate. For the year ended December 31, 2016, transfers from Level 3 to Level 1 were a result of an increase in observable inputs.

Emera’s Enterprise Risk Management group is responsible for valuation policies, processes and the measurement of fair value. Fair value accounting rules provide a three level hierarchy that prioritizes the inputs used to measure fair value. When possible, determining fair value is based primarily on observable market inputs in active markets.

Contracts with quoted prices available in active markets and exchanges for identical assets or liabilities are classified as level 1 in the hierarchy. For those contracts whereby pricing inputs are either directly or indirectly observable through markets, exchanges or third party sources, but do not qualify as level 1, are classified as level 2 in the hierarchy. For a level 3 classification, the processes and methods of measurement for third-party pricing information and illiquid markets are developed with input and using the market knowledge of the trading operations within Emera and its affiliates.

Significant unobservable inputs used in the fair value measurement of Emera’s natural gas and power derivatives includes third-party-sourced pricing for instruments based on illiquid markets; internally developed correlation factors and basis differentials; own credit risk; and discount rates. Internally developed correlations and basis differentials are reviewed on a quarterly basis based on statistical analysis of the spot markets in the various illiquid term markets. Where possible, Emera also sources multiple broker prices in an effort to evaluate and substantiate these unobservable inputs. Discount rates may include a risk premium for those long-term forward contracts with illiquid future price points to incorporate the inherent uncertainty of these points. Any risk premiums for long-term contracts are evaluated by observing similar industry practices and in discussion with industry peers. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement.

The following table outlines quantitative information about the significant unobservable inputs used in the fair value measurements categorized within Level 3 of the fair value hierarchy:

As at		December 31, 2016
millions of Canadian dollars		Fair Value	ValuationTechnique	Unobservable Input	Range	Weighted average
Assets
Regulatory deferral – Financial	$	1	Modelled pricing	Third-party pricing	$69.64	$69.64
oil derivatives				Probability of default	0.80%	0.80%
HFT derivatives –		27	Modelled pricing	Third-party pricing	$1.41 - $11.87	$3.87
Natural gas swaps,				Probability of default	0.00% - 0.07%	0.01%
futures, forwards,				Discount rate	0.00% - 0.32%	0.05%
physical contracts		12	Modelled pricing	Third-party pricing	$1.83 - $11.87	$6.16
and related transportation				Basis adjustment	(0.11)% - 0.64%	0.39%
				Probability of default	0.00% - 0.05%	0.00%
				Discount rate	0.00% - 0.10%	0.00%
Total assets	$	40
Liabilities
HFT derivatives –	$	386	Modelled pricing	Third-party pricing	$1.55 - $11.87	$6.26
Natural gas swaps, futures,				Own credit risk	0.00% - 0.07%	0.00%
forwards and physical contracts				Discount rate	0.00% - 0.14%	0.02%
		3	Modelled pricing	Third-party pricing	$1.83 - $11.87	$5.93
				Basis adjustment	(0.11)% - 0.64%	0.27%
				Own credit risk	0.00% - 0.05%	0.01%
				Discount rate	0.00% - 0.10%	0.01%
Total liabilities		389
Net assets (liabilities)	$	(349)

As at		December 31, 2015
millions of Canadian dollars		Fair Value	ValuationTechnique	Unobservable Input	Range	Weighted average
Assets
Regulatory deferral – Physical	$	2	Modelled pricing	Third-party pricing	$5.15 - $6.21	$5.72
natural gas purchases and sales				Probability of default	0.01%	0.01%
HFT derivatives –		(8)	Modelled pricing	Third-party pricing	$26.27 - $129.20	$70.45
Power swaps and				Correlation factor	0.98% - 1.00%	0.99%
physical contracts				Probability of default	0.00% - 0.02%	0.00%
				Discount rate	0.00% - 0.15%	0.01%
		54	Modelled pricing	Third-party pricing	$1.13 - $9.12	$3.26
				Probability of default	0.00% - 0.10%	0.01%
				Discount rate	0.00% - 0.33%	0.04%
		3	Modelled pricing	Third-party pricing	$1.25 - $15.74	$6.19
				Basis adjustment	(0.06)% - 0.95%	0.68%
				Probability of default	0.00% - 0.09%	0.00%
				Discount rate	0.00% - 0.08%	0.00%
Total assets	$	51
Liabilities
HFT derivatives –	$	(2)	Modelled pricing	Third-party pricing	$26.27 - $129.20	$70.82
Power swaps and				Correlation factor	0.98% - 1.00%	0.99%
physical contracts				Own credit risk	0.00% - 0.02%	0.00%
				Discount rate	0.00% - 0.15%	0.01%
HFT derivatives –		279	Modelled pricing	Third-party pricing	$0.74 - $10.59	$5.58
Natural gas swaps,				Probability of default	0.00% - 0.03%	0.00%
physical contracts				Discount rate	0.00% - 0.12%	0.01%
Total liabilities		277
Net assets (liabilities)	$	(226)

The financial assets and liabilities included on the Consolidated Balance Sheets that are not measured at fair value consisted of the following:

As at					December 31, 2016
millions of Canadian dollars		Carrying Amount		Fair Value		Level 1		Level 2		Level 3		Total
Long-term debt (including current portion)	$	14,744	$	15,723	$	78	$	14,843	$	802	$	15,723

As at					December 31, 2015
millions of Canadian dollars		Carrying Amount		Fair Value		Level 1		Level 2		Level 3		Total
Long-term debt (including current portion)	$	4,009	$	4,487	$	-	$	3,841	$	646	$	4,487

The fair values of long-term debt instruments, classified as level 1 in the fair value hierarchy, are valued using unadjusted quoted closing market prices that are traded in active markets.

Those classified as level 2 are valued either by using recent quoted market prices for the instrument where the instrument is not frequently traded, by using quoted closing market prices for similar issues that are frequently traded in an active market or by using quoted market prices and applying estimated credit spreads, provided by third-party pricing services, to the par value of the security.

Those classified as level 3 are valued by discounting the future cash flows of the specific debt instrument at an estimated yield to maturity equivalent to benchmark government bonds with similar terms to maturity, plus a credit risk premium equal to that of issuers of similar credit quality.

The Company has designated $1.2 billion United States dollar dominated Hybrid Notes as a hedge of the foreign currency exposure of its net investment in United States dollar denominated operations. A foreign currency loss of $49 million was recorded in Other Comprehensive Income for the twelve months ended December 31, 2016 (2015 – nil). There was no ineffectiveness for the twelve months ended December 31, 2016 (2015 – nil).

All other financial assets and liabilities, such as cash and cash equivalents, restricted cash, accounts receivable, short-term debt and accounts payable, are carried at cost. The carrying value approximates fair value due to the short-term nature of these financial instruments.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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