The fair value of a financial instrument is the consideration estimated to be agreed upon in an arm's-length transaction between knowledgeable, willing parties who are under no compulsion to act. Fair values are determined by reference to quoted bid or asking prices, as appropriate, in the most advantageous active market for that instrument to which Superior has immediate access. Where bid and ask prices are unavailable, Superior uses the closing price of the most recent transaction of the instrument. In the absence of an active market, Superior estimates fair values based on prevailing market rates (bid and ask prices, as appropriate) for instruments with similar characteristics and risk profiles or internal or external valuation models, such as discounted cash flow analysis using, to the extent possible, observable market-based inputs.
Fair values determined using valuation models require assumptions concerning the amount and timing of estimated future cash flows and discount rates. In determining those assumptions, Superior looks primarily to available readily observable external market inputs including forecast commodity price curves, interest rate yield curves, currency rates, and price and rate volatilities as applicable. With respect to the valuation of Specialty Chemicals' fixed-price electricity agreement, the valuation of this agreement requires Superior to make assumptions about the long-term price of electricity in electricity markets for which active market information is not available. The impact of the assumption for the long-term forward price curve of electricity has a material impact on the fair value of this agreement. A $1/MWh change in the forecast price of electricity would result in a change in the fair value of this agreement of $0.8 million, with a corresponding impact to net income before income taxes. Any changes in the fair values of derivative financial instruments classified or designated as held-for-trading are recognized in net income.
During August 2012, Specialty Chemicals received a payment of $15.8 million from TransCanada Energy Ltd., a subsidiary of TransCanada Corporation, in connection with the arbitration ruling related to the Sundance Power Purchase Agreement (PPA) between TransAlta Corporation and TransCanada Corporation. The payment resulted from the Electrical Sales Agreement (ESA) between TransCanada Corporation and Superior whereby TransCanada Corporation supplies Superior with fixed-priced energy from the PPA. A one-time gain of $12.5 million, representing the payment, net of certain settlement costs, is recorded in cost of goods sold. This settlement relates to Specialty Chemicals fixed-price electricity purchase agreement which expires in 2017. Specialty Chemicals expects to receive electricity production from the PPA by the end of 2013 once the production units have been returned to service.
-------------------------------------------------------------------------------------------------------------------------------------------------------- Fair ValueDescription Notional(1) Term Effective Rate Input Level----------------------------------------------------------------------------Natural gas financial CDN$3.93/ swaps-AECO 25.28 GJ(2) 2013-2017 GJ Level 1Foreign currency forward contracts, net sale US$642.4(3) 2013-2015 1.03 Level 1Foreign currency forward contracts, balance sheet- related US$59.0(3) 2013-2014 1.01 Level 1Interest rate Six-month BA swaps - CDN$ $150.0(3) 2013-2017 rate plus 2.65% Level 2Equity derivative contracts $7.5(3) 2013-2018 $9.48/share Level 2Debenture- embedded derivative $255.0(3) 2013-2018 - Level 3Energy Services Propane wholesale purchase and sale contracts, net sale 5.73 USG(4) 2013-2014 $0.92/USG Level 2Energy Services Butane wholesale purchase and sale contracts, net sale 1.54 USG(4) 2013-2014 $1.78/USG Level 2Energy Services electricity swaps 0.91MWh(5) 2013-2016 $41.76/MWh Level 2Energy Services swaps and option purchase and sale 27.17 $2.95 contracts Gallons(4) 2013 US/Gallon Level 2Specialty Chemicals fixed-price electricity purchase agreement 12-45 MW(6) 2013-2017 $37-$59/MWh Level 3-------------------------------------------------------------------------------------------------------------------------------------------------------- Asset (Liability)---------------------------------------------------------------------------- December 31, December 31,Description 2012 2011----------------------------------------------------------------------------Natural gas financial swaps-AECO (42.2) (78.9)Foreign currency forward contracts, net sale 10.7 5.7Foreign currency forward contracts, balance sheet- related 0.1 -Interest rate swaps - CDN$ 9.4 10.9Equity derivative contracts 0.5 -Debenture- embedded derivative (19.8) (0.6)Energy Services Propane wholesale purchase and sale contracts, net sale 0.7 (0.6)Energy Services Butane wholesale purchase and sale contracts, net sale (0.2) 0.2Energy Services electricity swaps (10.3) (16.0)Energy Services swaps and option purchase and sale contracts (0.2) (0.7)Specialty Chemicals fixed-price electricity purchase agreement 1.6 -----------------------------------------------------------------------------(1) Notional values as at December 31, 2012(2) Millions of gigajoules (GJ) purchased.(3) Millions of dollars.(4) Millions of United States gallons purchased.(5) Millions of mega watt hours (MWh).(6) Megawatts (MW) on a 24/7 continual basis per year purchased.
