Derivative Instruments

12 Months Ended

Dec. 31, 2017

14. DERIVATIVE INSTRUMENTS

16. DERIVATIVE INSTRUMENTS

The Company enters into futures, forwards, swaps and option contracts as part of its risk management strategy to limit exposure to:

commodity price fluctuations related to the purchase and sale of commodities in the course of normal operations;
foreign exchange fluctuations on foreign currency denominated purchases and sales; and
interest rate fluctuations on debt securities.

The Company also enters into physical contracts for energy commodities. Collectively, these contracts are considered “derivatives”. The Company accounts for derivatives under one of the following four approaches:

Physical contracts that meet the normal purchases normal sales (“NPNS”) exemption are not recognized on the balance sheet; they are recognized in income when they settle. A physical contract generally qualifies for the NPNS exemption if the transaction is reasonable in relation to the Company’s business needs, the counterparty owns or controls resources within the proximity to allow for physical delivery, the Company intends to receive physical delivery of the commodity, and the Company deems the counterparty credit worthy. The Company continually assesses contracts designated under the NPNS exemption and will discontinue the treatment of these contracts under this exception if the criteria are no longer met.
Derivatives that qualify for hedge accounting are recorded at fair value on the balance sheet. Derivatives qualify for hedge accounting if they meet stringent documentation requirements and can be proven to effectively hedge the identified cash flow risk both at the inception and over the term of the derivative. Specifically for cash flow hedges, the effective portion of the change in the fair value of derivatives is deferred to AOCI and recognized in income in the same period the related hedged item is realized. Any ineffective portion of the change in fair value from cash flow hedges is recognized in net income in the reporting period.
Where the documentation or effectiveness requirements are not met, the derivatives are recognized at fair value with any changes in fair value recognized in net income in the reporting period, unless deferred as a result of regulatory accounting.
Derivatives entered into by Tampa Electric, PGS, NMGC, NSPI and GBPC that are documented as economic hedges, and for which the NPNS exception has not been taken, are subject to regulatory accounting treatment. These derivatives are recorded at fair value on the balance sheet as derivative assets or liabilities. The change in fair value of the derivatives is deferred to a regulatory asset or liability. The gain or loss is recognized in the hedged item when the hedged item is settled. Management believes that any gains or losses resulting from settlement of these derivatives related to fuel for generation and purchased power will be refunded to or collected from customers in future rates.
Derivatives that do not meet any of the above criteria are designated as HFT derivatives and are recorded on the balance sheet at fair value, with changes normally recorded in net income of the period, unless deferred as a result of regulatory accounting. The Company has not elected to designate any derivatives to be included in the HFT category where another accounting treatment would apply.

Derivative assets and liabilities relating to the foregoing categories consisted of the following:
		Derivative Assets				Derivative Liabilities
As at	December 31		December 31		December 31		December 31
millions of Canadian dollars		2017		2016		2017		2016
Cash flow hedges
Power swaps	$	5	$	10	$	2	$	5
Foreign exchange forwards		2		-		5		22
		7		10		7		27
Regulatory deferral
Commodity swaps and forwards
Coal purchases		137		83		10		9
Power purchases		5		7		3		4
Natural gas purchases and sales		6		33		7		2
Heavy fuel oil purchases		15		10		4		7
Foreign exchange forwards		32		106		4		-
		195		239		28		22
HFT derivatives
Power swaps and physical contracts		125		47		162		71
Natural gas swaps, futures, forwards, physical contracts		105		111		294		484
		230		158		456		555
Other derivatives
Interest rate swap		2		-		-		1
Foreign exchange forwards		-		-		-		1
		2		-		-		2
Total gross current derivatives		434		407		491		606
Impact of master netting agreements with intent to settle net or simultaneously		(181)		(131)		(181)		(131)
		253		276		310		475
Current		141		145		227		325
Long-term		112		131		83		150
Total derivatives	$	253	$	276	$	310	$	475
Derivative assets and liabilities are classified as current or long-term based upon the maturities of the underlying contracts.

Details of master netting agreements, shown net on the Consolidated Balance Sheets, are summarized in the following table:

		Derivative Assets				Derivative Liabilities
As at	December 31		December 31		December 31		December 31
millions of Canadian dollars		2017		2016		2017		2016
Regulatory deferral	$	14	$	10	$	14	$	10
HFT derivatives		167		121		167		121
Total impact of master netting agreements withintent to settle net or simultaneously	$	181	$	131	$	181	$	131

Cash Flow Hedges

The Company enters into various derivatives designated as cash flow hedges. Emera enters into power swaps to limit Bear Swamp’s exposure to purchased power prices. The Company also enters into foreign exchange forwards to hedge the currency risk for revenue streams denominated in foreign currency for Brunswick Pipeline.

The amounts related to cash flow hedges recorded in income and AOCI consisted of the following:

For the	Year ended December 31
millions of Canadian dollars						2017						2016
			Interest		Foreign				Interest		Foreign
	Power		rate		exchange		Power		rate		exchange
	swaps		swaps		forwards		swaps		swaps		forwards
Realized gain (loss) in non-regulated fuel for generation and purchased power		3		-		-		2		-		-
Realized gain (loss) in operating revenue – Regulated		-		-		(10)		-		-		(12)
Realized gain (loss) in income from equity investments		-		-		-		-		(1)		-
Total gains (losses) in Net income	$	3	$	-	$	(10)	$	2	$	(1)	$	(12)

As at	December 31
millions of Canadian dollars						2017						2016
			Interest		Foreign				Interest		Foreign
	Power		rate		exchange		Power		rate		exchange
	swaps		swaps		forwards		swaps		swaps		forwards
Total unrealized gain (loss) in AOCI – effective portion, net of tax	$	-	$	-	$	(3)	$	2	$	-	$	(22)

The Company expects $5 million of unrealized losses currently in AOCI to be reclassified into net income within the next twelve months, as the underlying hedged transactions settle.

As at December 31, 2017, the Company had the following notional volumes of outstanding derivatives designated as cash flow hedges that are expected to settle as outlined below:

millions		2018		2019		2020		2021		2022
Foreign exchange forwards (USD) sales	$	45	$	30	$	30	$	-	$	-

Regulatory Deferral

The Company has recorded the following changes in realized and unrealized gains (losses) with respect to derivatives receiving regulatory deferral:

For the	Year ended December 31
millions of Canadian dollars						2017						2016
	Commodity swaps and forwards		Physical natural gas purchases and sales		Foreign exchange forwards		Commodity swaps and forwards		Physical natural gas purchases and sales		Foreign exchange forwards
Unrealized gain (loss) in regulatory assets	$	(33)	$	(1)	$	(4)	$	40	$	-	$	(2)
Unrealized gain (loss) in regulatory liabilities		83		1		(30)		101		(1)		(30)
Realized (gain) loss in regulatory assets		-		-		-		-		-		12
Realized (gain) loss in regulatory liabilities		(2)		-		-		-		-		(8)
Realized (gain) loss in inventory (1)		(17)		-		(30)		5		-		(44)
Realized (gain) loss in regulated fuel for generation and purchased power (2)		(3)		-		(14)		17		(1)		(18)
Total change derivative instruments	$	28	$	-	$	(78)	$	163	$	(2)	$	(90)
(1) Realized (gains) losses will be recognized in fuel for generation and purchased power when the hedged item is consumed.
(2) Realized (gains) losses on derivative instruments settled and consumed in the period; hedging relationships that have been terminated or the hedged transaction is no longer probable.

Commodity Swaps and Forwards

As at December 31, 2017, the Company had the following notional volumes of commodity swaps and forward contracts designated for regulatory deferral that are expected to settle as outlined below:

	2018	2019-2021
millions	Purchases	Purchases
Coal (metric tonnes)	1	1
Natural Gas (Mmbtu)	30	14
Heavy fuel oil (bbls)	-	1

Foreign Exchange Swaps and Forwards

As at December 31, 2017, the Company had the following notional volumes of foreign exchange swaps and forward contracts related to commodity contracts that are expected to settle as outlined below:

	2018		2019-2020
Foreign exchange contracts (millions of US dollars)	$	144	$	156
Weighted average rate		1.1061		1.2001
% of USD requirements		79%		40%

The Company reassesses foreign exchange forecasted periodically and will enter into additional hedges or unwind existing hedges, as required.

Held-for-Trading Derivatives

In the ordinary course of its business, Emera enters into physical contracts for the purchase and sale of natural gas, as well as power and natural gas swaps, forwards and futures, to economically hedge those physical contracts. These derivatives are all considered HFT.

The Company has recognized the following realized and unrealized gains (losses) with respect to HFT derivatives:

For the	Year ended December 31
millions of Canadian dollars		2017		2016
Power swaps and physical contracts in non-regulated operating revenues	$	7	$	(1)
Natural gas swaps, forwards, futures and physical contracts in non-regulated operating revenues		401		69
Natural gas swaps, forwards, futures and physical contracts in non-regulated fuel for generation and purchased power		10		(7)
Power swaps, forwards, futures and physical contracts in non-regulated fuel for generation and purchased power		2		-
Foreign exchange options in other income (expenses), net		-		(2)
	$	420	$	59

As at December 31, 2017, the Company had the following notional volumes of outstanding HFT derivatives that are expected to settle as outlined below:

millions		2018		2019		2020		2021		2022
Natural gas purchases (Mmbtu)		325		134		62		44		41
Natural gas sales (Mmbtu)		250		56		21		8		2
Power purchases (MWh)		7		2		-		-		-
Power sales (MWh)		8		1		-		-		-
Foreign exchange options (USD)	$	2	$	4	$	-	$	-	$	-

Other Derivatives

The Company has recognized the following realized and unrealized gains (losses) with respect to cash flow hedges which documentation requirements have not been met:

For the		Year ended December 31
millions of Canadian dollars				2017				2016
		Interest		Foreign		Interest		Foreign
		rate		exchange	rate		exchange
		swaps		forwards	swaps		forwards
Realized gain (loss) in other income (expense)	$	-	$	-	$	-	$	(87)
Unrealized gain (loss) in interest expense, net		2		-		2		-
Total gains (losses) in net income	$	2	$	-	$	2	$	(87)

As at December 31, 2017, the Company had interest rate swaps in place for the $250 million non-revolving term credit facility in Brunswick Pipeline for interest payments until the debt matures in 2019.

Credit Risk

The Company is exposed to credit risk with respect to amounts receivable from customers, energy marketing collateral deposits and derivative assets. Credit risk is the potential loss from a counterparty’s non-performance under an agreement. The Company manages credit risk with policies and procedures for counterparty analysis, exposure measurement, and exposure monitoring and mitigation. Credit assessments are conducted on all new customers and counterparties, and deposits or collateral are requested on any high risk accounts.

The Company assesses the potential for credit losses on a regular basis, and where appropriate, maintains provisions. With respect to counterparties, the Company has implemented procedures to monitor the creditworthiness and credit exposure of counterparties and to consider default probability in valuing the counterparty positions. The Company monitors counterparties’ credit standing, including those that are experiencing financial problems, have significant swings in default probability rates, have credit rating changes by external rating agencies, or have changes in ownership. Net liability positions are adjusted based on the Company’s current default probability. Net asset positions are adjusted based on the counterparty’s current default probability. The Company assesses credit risk internally for counterparties that are not rated.

As at December 31, 2017, the maximum exposure the Company has to credit risk is $1,148 million (2016 - $1,019 million), which includes accounts receivable net of collateral/deposits and assets related to derivatives.

It is possible that volatility in commodity prices could cause the Company to have material credit risk exposures with one or more counterparties. If such counterparties fail to perform their obligations under one or more agreements, the Company could suffer a material financial loss. The Company transacts with counterparties as part of its risk management strategy for managing commodity price, foreign exchange and interest rate risk. Counterparties that exceed established credit limits can provide a cash deposit or letter of credit to the Company for the value in excess of the credit limit where contractually required. The total cash deposits/collateral on hand as at December 31, 2017 was $247 million (2016 - $271 million), which mitigates the Company’s maximum credit risk exposure. The Company uses the cash as payment for the amount receivable or returns the deposit/collateral to the customer/counterparty where it is no longer required by the Company.

The Company enters into commodity master arrangements with its counterparties to manage certain risks, including credit risk to these counterparties. The Company generally enters into International Swaps and Derivatives Association agreements (“ISDA”), North American Energy Standards Board agreements (“NAESB”) and, or Edison Electric Institute agreements. The Company believes that entering into such agreements offers protection by creating contractual rights relating to creditworthiness, collateral, non-performance and default.

As at December 31, 2017, the Company had $90 million (2016 - $104 million) in financial assets, considered to be past due, which have been outstanding for an average 69 days. The fair value of these financial assets is $78 million (2016 - $91 million), the difference of which is included in the allowance for doubtful accounts. These assets primarily relate to accounts receivable from electric and gas revenue.

Concentration Risk

The Company's concentrations of risk consisted of the following:

As at	December 31, 2017			December 31, 2016
	millions of Canadian dollars		% of total exposure	millions of Canadian dollars		% of total exposure
Receivables, net
Regulated utilities
Residential	$	326	23%	$	315	24%
Commercial		161	11%		170	13%
Industrial		46	3%		38	3%
Other		96	7%		69	5%
		629	44%		592	45%
Trading group
Credit rating of A- or above		55	4%		52	4%
Credit rating of BBB- to BBB+		61	4%		60	5%
Not rated		96	7%		57	4%
		212	15%		169	13%
Other accounts receivable		300	22%		253	20%
		1,141	81%		1,014	78%
Derivative Instruments (current and long-term)
Credit rating of A- or above		207	15%		252	20%
Credit rating of BBB- to BBB+		10	1%		1	0%
Not rated		36	3%		23	2%
		253	19%		276	22%
	$	1,394	100%	$	1,290	100%

Cash Collateral

The Company’s cash collateral positions consisted of the following:

As at	December 31		December 31
millions of Canadian dollars		2017		2016
Cash collateral provided to others	$	119	$	91
Cash collateral received from others		99		52

Collateral is posted in the normal course of business based on the Company’s creditworthiness, including its senior unsecured credit rating as determined by certain major credit rating agencies. Certain derivatives contain financial assurance provisions that require collateral to be posted if a material adverse credit-related event occurs. If a material adverse event resulted in the senior unsecured debt falling below investment grade, the counterparties to such derivatives could request ongoing full collateralization.

As at December 31, 2017, the total fair value of these derivatives, in a liability position, was $310 million (December 31, 2016 – $475 million). If the credit ratings of the Company were reduced below investment grade the full value of the net liability position could be required to be posted as collateral for these derivatives.