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 (Level 1). 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 (Level 2). Superior uses internally developed methodologies and unobservable inputs to determine the fair value of some financial instruments when required (Level 3).
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.
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.
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 earnings before income taxes.
No changes in valuation techniques were made by Superior during the period ended March 31, 2013 and no financial instruments have been reclassified between the different fair value input levels.
--------------------------------------------------------------------------------------------------------------------------------------------------------Description Notional(1) Term Effective Rate----------------------------------------------------------------------------Natural gas financial swaps-AECO 2013- CDN$4.79/ 23.74 GJ(2) 2017 GJForeign currency forward 2013- contracts, net sale US$642.4(3) 2015 1.03Foreign currency forward 2013- contracts, balance sheet-related US$59.0(3) 2014 1.01Interest rate swaps - CDN$ 2013- Six-month BA rate $150.0(3) 2017 plus 2.65%Equity derivative contracts 2013- $12.6(3) 2015 $10.26/shareDebenture-embedded derivative 2013- $255.0(3) 2018 -Energy Services Propane wholesale purchase and sale contracts, net 1.28 2013- sale USG(4) 2014 $0.96/USGEnergy Services Butane wholesale purchase and sale contracts, net 2013- sale 1.11 USG(4) 2014 $3.03USGEnergy Services electricity swaps 2013- 0.93MWh (5) 2016 $40.27/MWhEnergy Services swaps and option 1.11 purchase and sale contracts Gallons(4) 2013 $3.03 US/GallonSpecialty Chemicals fixed-price 2013- electricity purchase agreement 12-45 MW(6) 2017 $37-$59/MWh-------------------------------------------------------------------------------------------------------------------------------------------------------- Asset (Liability)---------------------------------------------------------------------------- Fair Value March 31, December 31,Description Input Level 2013 2012----------------------------------------------------------------------------Natural gas financial swaps-AECO Level 1 (27.7) (42.2)Foreign currency forward contracts, net sale Level 1 (2.9) 10.7Foreign currency forward contracts, balance sheet-related Level 1 1.2 0.2Interest rate swaps - CDN$ Level 2 9.7 9.4Equity derivative contracts Level 2 1.5 0.5Debenture-embedded derivative Level 3 (33.1) (19.8)Energy Services Propane wholesale purchase and sale contracts, net sale Level 2 - 0.7Energy Services Butane wholesale purchase and sale contracts, net sale Level 2 - (0.2)Energy Services electricity swaps Level 2 (6.6) (10.3)Energy Services swaps and option purchase and sale contracts Level 2 - (0.2)Specialty Chemicals fixed-price electricity purchase agreement Level 3 1.7 1.6----------------------------------------------------------------------------(1) Notional values as at March 31, 2013 (2) Millions of gigajoules (GJ)purchased. (3) Millions of dollars. (4) Millions of United States gallonspurchased. (5) Millions of mega watt hours (MWh). (6) Megawatts (MW) on a24/7 continual basis per year purchased.
