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Fair Value Measurements | 12 Months Ended
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Dec. 31, 2020
16. Fair Value Measurements |
Fair Value Measurements | 16. FAIR VALUE MEASUREMENTS The Company is required to determine the fair value of all derivatives except those which qualify for the NPNS exemption (s ee note 1) and us es 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 liabi lities. 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 re lated to location differences. Also, c ertain 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 transactio ns 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 m odels, 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 class ification of the methodology used by the Company to fair value its derivatives:
As at |  | December 31, 2020
millions of Canadian dollars |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets |  |  |  |  |  |  |  |
Cash flow hedges |  |  |  |  |  |  |  |
Interest rate hedge | $ | 1 | $ | - | $ | - | $ | 1
|  | 1 |  | - |  | - |  | 1
Regulatory deferral |  |  |  |  |  |  |  |
Commodity swaps and forwards |  |  |  |  |  |  |  |
Power purchases |  | 9 |  | - |  | - |  | 9
Natural gas purchases and sales |  | 2 |  | 1 |  | - |  | 3
Heavy fuel oil purchases |  | - |  | 2 |  | - |  | 2
|  | 11 |  | 3 |  | - |  | 14
HFT derivatives |  |  |  |  |  |  |  |
Power swaps and physical contracts |  | 3 |  | 2 |  | 2 |  | 7
Natural gas swaps, futures, forwards, physical contracts and related transportation |  | 1 |  | 48 |  | 12 |  | 61
|  | 4 |  | 50 |  | 14 |  | 68
Other derivatives |  |  |  |  |  |  |  |
Foreign exchange forwards |  | - |  | 15 |  | - |  | 15
|  | - |  | 15 |  | - |  | 15
Total assets |  | 16 |  | 68 |  | 14 |  | 98
Liabilities |  |  |  |  |  |  |  |
Regulatory deferral |  |  |  |  |  |  |  |
Commodity swaps and forwards |  |  |  |  |  |  |  |
Coal purchases |  | - |  | 4 |  | - |  | 4
Power purchases |  | 33 |  | - |  | - |  | 33
Heavy fuel oil purchases |  | 3 |  | 3 |  | - |  | 6
Natural gas purchases and sales |  | - |  | 2 |  | - |  | 2
Foreign exchange forwards |  | - |  | 17 |  | - |  | 17
|  | 36 |  | 26 |  | - |  | 62
HFT derivatives |  |  |  |  |  |  |  |
Power swaps and physical contracts |  | 4 |  | 2 |  | 1 |  | 7
Natural gas swaps, futures, forwards and physical contracts |  | 1 |  | 10 |  | 257 |  | 268
|  | 5 |  | 12 |  | 258 |  | 275
Other derivatives |  |  |  |  |  |  |  |
Equity derivatives |  | 1 |  | - |  | - |  | 1
|  | 1 |  | - |  | - |  | 1
Total liabilities |  | 42 |  | 38 |  | 258 |  | 338
Net assets (liabilities) | $ | (26) | $ | 30 | $ | (244) | $ | (240)
As at |  | December 31, 2019
millions of Canadian dollars |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets |  |  |  |  |  |  |  |
Regulatory deferral |  |  |  |  |  |  |  |
Commodity swaps and forwards |  |  |  |  |  |  |  |
Power purchases | $ | 23 | $ | - | $ | - | $ | 23
Natural gas purchases and sales |  | - |  | 2 |  | - |  | 2
Heavy fuel oil purchases |  | - |  | 1 |  | - |  | 1
Foreign exchange forwards |  | - |  | 2 |  | - |  | 2
|  | 23 |  | 5 |  | - |  | 28
HFT derivatives |  |  |  |  |  |  |  |
Power swaps and physical contracts |  | 1 |  | 3 |  | 1 |  | 5
Natural gas swaps, futures, forwards, physical contracts and related transportation |  | (7) |  | 46 |  | 14 |  | 53
|  | (6) |  | 49 |  | 15 |  | 58
Other derivatives |  |  |  |  |  |  |  |
Equity derivatives |  | 1 |  | - |  | - |  | 1
|  | 1 |  | - |  | - |  | 1
Total assets |  | 18 |  | 54 |  | 15 |  | 87
Liabilities |  |  |  |  |  |  |  |
Cash flow hedges |  |  |  |  |  |  |  |
Foreign exchange forwards |  | - |  | 1 |  | - |  | 1
|  | - |  | 1 |  | - |  | 1
Regulatory deferral |  |  |  |  |  |  |  |
Commodity swaps and forwards |  |  |  |  |  |  |  |
Coal purchases |  | - |  | 31 |  | - |  | 31
Power purchases |  | 36 |  | - |  | - |  | 36
Natural gas purchased and sales |  | 3 |  | 2 |  | - |  | 5
Foreign exchange forwards |  | - |  | 6 |  | - |  | 6
|  | 39 |  | 39 |  | - |  | 78
HFT derivatives |  |  |  |  |  |  |  |
Power swaps and physical contracts |  | 5 |  | 2 |  | - |  | 7
Natural gas swaps, futures, forwards and physical contracts |  | 2 |  | 33 |  | 249 |  | 284
|  | 7 |  | 35 |  | 249 |  | 291
Total liabilities |  | 46 |  | 75 |  | 249 |  | 370
Net assets (liabilities) | $ | (28) | $ | (21) | $ | (234) | $ | (283)
The change in the fair value of the Level 3 financial assets for the year ended December 31, 2020 was as follows:
| HFT Derivatives
millions of Canadian dollars | Power | Natural gas | Total
Balance, January 1, 2020 | $ | 1 | $ | 14 | $ | 15
Total realized and unrealized gains (losses) included in non-regulated operating revenues |  | 3 |  | (2) |  | 1
Net transfers out of Level 3 |  | (2) |  | - |  | (2)
Balance, December 31, 2020 | $ | 2 | $ | 12 | $ | 14
The change in the fair value of the Level 3 financial liabilities for the year ended December 31, 2020 was as follows:
| HFT Derivatives
millions of Canadian dollars | Power | Natural gas | Total
Balance, January 1, 2020 | $ | - | $ | 249 | $ | 249
Total realized and unrealized gains included in non-regulated operating revenues |  | 2 |  | 8 |  | 10
Net transfers out of Level 3 |  | (1) |  | - |  | (1)
Balance, December 31, 2020 | $ | 1 | $ | 257 | $ | 258
The Company evaluates observable inputs of market data on a quarterly basis to determine if transfers between levels is appropriate. For the year ended December 31, 2020, transfers out of Level 3 were a result of an increase in observable inputs. Significant unobservable inputs used in the fair value measurement of Emera’s natural gas and power derivatives include 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 b ased on statistical analysis of the spot markets in the various illiquid term markets. 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, 2020
millions of Canadian dollars |  | Fair Value | Valuation Technique | Unobservable Input | Range | Weighted average (1)
Assets |  |  |  |  |  |
HFT derivatives – | $ | 1 | Modelled pricing | Third-party pricing | $20.50 - $62.45 | $31.14
Power swaps and |  |  |  | Probability of default | 0.02% - 9.74% | 2.52%
physical contracts |  |  |  | Discount rate | 0.01% - 0.73% | 0.25%
|  | 1 | Modelled pricing | Third-party pricing | $25.70 - $36.05 | $29.53
|  |  |  | Probability of default | 0.36% - 0.85% | 0.60%
|  |  |  | Discount rate | 0.06% - 0.41% | 0.28%
|  |  |  | Correlation factor | 100% - 100% | 100%
HFT derivatives – |  | 18 | Modelled pricing | Third-party pricing | $1.66 - $6.22 | $2.52
Natural gas swaps, futures, |  |  |  | Probability of default | 0.02% - 2.52% | 0.40%
forwards and physical contracts |  |  |  | Discount rate | 0.00% - 10.36% | 0.75%
|  | (6) | Modelled pricing | Third-party pricing | $1.82 - $8.44 | $4.66
|  |  |  | Basis adjustment | $0.00 - $1.33 | $0.44
|  |  |  | Probability of default | 0.02% - 12.58% | $1.95
|  |  |  | Discount rate | 0.00% - 0.67% | 0.13%
Total assets | $ | 14 |  |  |  |
Liabilities |  |  |  |  |  |
HFT derivatives – | $ | 1 | Modelled pricing | Third-party pricing | $1.13 - $62.45 | $36.90
Power swaps and |  |  |  | Own credit risk | 0.02% - 6.85% | 2.02%
physical contracts |  |  |  | Discount rate | 0.01% - 0.73% | 0.34%
|  | 1 | Modelled pricing | Third-party pricing | $37.25 - $62.45 | $55.00
|  |  |  | Own credit risk | 0.36% - 1.28% | 0.83%
|  |  |  | Discount rate | 0.01% - 0.40% | 0.31%
|  |  |  | Correlation factor | 100% - 100% | 100%
HFT derivatives – |  | 226 | Modelled pricing | Third-party pricing | $1.44 - $6.57 | $3.68
Natural gas swaps, futures, |  |  |  | Own credit risk | 0.02% - 2.52% | 0.10%
forwards and physical contracts |  |  |  | Discount rate | 0.00% - 8.79% | 0.43%
|  | 30 | Modelled pricing | Third-party pricing | $1.54 - $8.44 | $4.69
|  |  |  | Basis adjustment | $0.00 - $1.33 | $0.87
|  |  |  | Own credit risk | 0.03% - 12.58% | 0.10%
|  |  |  | Discount rate | 0.00% - 0.67% | 0.16%
Total liabilities | $ | 258 |  |  |  |
Net assets (liabilities) | $ | (244) |  |  |  |
(1) Unobservable inputs were weighted by the relative fair value of the instruments
As at |  | December 31, 2019
millions of Canadian dollars |  | Fair Value | Valuation Technique | Unobservable Input | Range | Weighted average
Assets |  |  |  |  |  |
HFT derivatives – | $ | 1 | Modelled pricing | Third-party pricing | $21.40 - $74.05 | $35.03
Power swaps and |  |  |  | Probability of default | 0.01% - 1.14% | 0.21%
physical contracts |  |  |  | Discount rate | 0.15% - 6.65% | 2.78%
HFT derivatives – |  | 9 | Modelled pricing | Third-party pricing | $1.63 - $7.45 | $2.37
Natural gas swaps, futures, |  |  |  | Probability of default | 0.01% - 2.31% | 0.09%
forwards, and physical contracts |  |  |  | Discount rate | 0.01% - 20.93% | 1.55%
|  | 5 | Modelled pricing | Third-party pricing | $1.33 - $8.76 | $5.05
|  |  |  | Basis adjustment | $0.00 - $1.31 | $0.76
|  |  |  | Probability of default | 0.01% - 3.33% | 0.28%
|  |  |  | Discount rate | 0.01% - 4.71% | 0.91%
Total assets | $ | 15 |  |  |  |
Liabilities |  |  |  |  |  |
HFT derivatives – |  | 228 | Modelled pricing | Third-party pricing | $1.54 - $7.45 | $4.07
Natural gas swaps, futures, |  |  |  | Own credit risk | 0.01% - 2.31% | 0.12%
forwards and physical contracts |  |  |  | Discount rate | 0.01% - 18.63% | 1.89%
|  | 21 | Modelled pricing | Third-party pricing | $1.36 - $9.75 | $5.45
|  |  |  | Basis adjustment | $0.00 - $1.31 | $0.91
|  |  |  | Own credit risk | 0.01% - 3.33% | 0.06%
|  |  |  | Discount rate | 0.01% - 3.76% | 0.81%
Total liabilities | $ | 249 |  |  |  |
Net assets (liabilities) | $ | (234) |  |  |  |
Long-term debt is a financial liability not measured at fair value on the Consolidated Balance Sheets. The balance consisted of the following:
As at |  |
millions of Canadian dollars |  | Carrying Amount |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
December 31, 2020 | $ | 13,721 | $ | 16,487 | $ | - | $ | 16,020 | $ | 467 | $ | 16,487
December 31, 2019 | $ | 14,180 | $ | 16,049 | $ | - | $ | 15,598 | $ | 451 | $ | 16,049
The Company has designated $1.2 billion United States dollar den ominated Hybrid Notes as a hedge of the foreign currency exposure of its ne t investment in United States dollar denominated oper ations. An after-tax foreign currency gain of $26 million was recorded in Other Comprehensive Income for the year ended December 31, 2020 (2019 – $7 8 million).

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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